Explain the alternative bases of measurement used to measure the assets and liabilities in the balance sheet.

May 15th, 2011 Comments off
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Historical cost

  • The amount of cash or cash equivalent paid to purchase an asset ( plus any cost of acquisition and/ preparation.
  • If asset not bought for cash, historical cost is the fair value of whatever was given in order to buy the asset
  • For liabilities, the historical cost basis of measurement is the amount of proceeds received in exchange for the obligation.

Current cost:

  • For assets, current cost is the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today.
  • For liabilities, the current cost basis of measurement is the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today

Realizable (settlement) value:

  • For assets, realizable value is the amount of cash or cash equivalents that could be currently be obtained by selling the asset in an orderly disposal.
  • For liabilities, the equivalent to realizable value is called “ settlement value”- that is settlement value is the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business

Present value:

  • For assets, present value is the present discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business
  • For liabilities, present value is the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business

Fair value:

  • Is the amount at which an asset could be exchange, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction, which may involve either market measures or present measure.

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Financial Accounting

 
 

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