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Risk Model

In: Business and Management

Submitted By IriniLee
Words 2425
Pages 10
BAO3309 Individual Research Assignment

2015

1. The measurement concepts in relation to historical cost and fair value accounting. IASB framework defines that measurement is the process to determine the monetary amount of the financial statements’ elements are to be recognized and carried on the balance sheet and income statements ( IASB Framework 2010). 1.1 Historical cost Historical cost is an accounting method about the original nominal monetary value of an economic item at the time of transaction (IFRS). Under this method, assets and liabilities listed on the balance sheet with the value at their purchase or acquisition, rather than the current market value. According to the historical cost principle, most assets or liabilities are recorded at historical cost on the balance sheet even if there is a significantly change in the value over a period. Hence the balance sheet value of the items may differ from the real value and this value is never adjusted by the changing of market and economy. For example, 10units of one item were purchased for $10 each. The price of this item today is $11 per unit. Therefore the inventory should appear on the balance sheet at $100 and not at $110. 1.2 Fair Value According to IFRS13, fair value is regarded as a scientifically true measurement concept. To be more specific, fair value is a market-based measurement; it is not an entity specific measurement. In other words, fair value is the price that the company will be received to sell assets or paid for transfer liabilities in an orderly transaction at the measurement date between market participants (Deloitte, 2015). When the company takes the fair value measurement, that company needs to determine the particular asset or liability and the principle market for that asset or liability. The entity also needs to consider the appropriate valuation techniques for…...

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