1) Discuss the differences between historical cost and current replacement cost basis of measurement as applied to assets
Historical cost: This is the method of reporting assets /liabilities of an entity at the price at which they were originally acquired. The historical cost has the disadvantage of not necessarily representing the actual fair value of an asset, which is likely to diverge from its purchase cost over time. The historical cost concept is clarified by the cost principle, which states that you should only record an asset, liability, or equity investment at its original acquisition cost.
Current replacement cost: Is the method of reporting assets /liabilities according to the cost of replacing them at current market price. This is the opposite of historical accounting. This cost can change depending on changes in market value. The replacement cost of an asset may vary from the market value of that specific asset, since the asset that would actually replace it may have a different cost. The replacement asset only has to perform the same functions as the original asset - it does not have to be an exact copy of the original asset.
Replacement cost is a common term used in insurance policies to cover damage to a company's assets. 2) Discuss the different levels of fair value determination
According to International Finance Reporting Standard 13(IFRS 13) fair value determination is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
The following are the 3 different levels of fair value
Level 1: inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. [IFRS 13:80] Level one asset can be valued with certainty because they are liquid and have clear market prices