【ACCT6001 – Measurement -Chloe】
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ACCT6001 Fair Value Measurement

Content
1 Measurement and Choice of Accounting Methods
主讲人：Chloe
【ACCT6001 – Measurement -Chloe】
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Topic： Measurement and Choice of Accounting Methods
AASB108 Accounting Policies, Changes in Accounting Estimates and Errors
AASB13 Fair value

知识点 1: Measurement

Broad definition of measurement: “the assignment of numerals to objects or events
Accountants use money to measure, so all accounting measures have a dollar sign.

1. Ways of Measurement (measurement basis)

1) Historical cost: at the amount of cash paid or fair value of the consideration given to acquire them
at the time of their acquisition. (e.g. equipment)
2) Current cost: at the amount of cash that would have to be paid if the same or an equivalent asset
was acquired currently.
3) Market value (realizable value): at the amount of cash that could currently be obtained by selling
the asset in an orderly disposal. (和 fair value 不一样)
4) Present value: at the present discounted value of the future net cash inflows that the item is expected
to generate in the normal course of business.

In accounting practice, multiple different measures are used for different types of elements (eg
Accounts receivable, plant and equipment). [一个 class 用一个方法]

2. Choice of measurement basis

professional judgment based on the facts and circumstances for each account balance

两个关键: relevance and faithful representation

举个栗子：inventory, intangible asset (week 4)

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知识点 2: Fair value

1. Fair value 定义***
The price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly
transaction between market participants at the measurement date (AASB 13)

– Fair values change as market prices change.
– If changes in fair value are recognised in financial statements, they will affect the financial
performance and financial position of the entity.
– Although fair values have been used in Australia for many years for property, plant and
equipment (Topics 3-4), standard-setters’ efforts to apply fair values to financial instruments
have received significant attention and has been most controversial.

1) An asset or liability
• A stand-alone asset (or liability), e.g. a non-financial asset; or
• A group of assets, a group of liabilities or a group of assets and liabilities (e.g. a business).
– Identification of what is being measured depends on the specific accounting standard (eg, an
item of property, plant and equipment (PPE) would be as a stand-alone asset under AASB 116
Property Plant and Equipment).
• Specific characteristics of the asset (or liability) must be taken into account if market participants
would consider those characteristics when pricing the asset (or liability).
– For non-financial assets such as PPE, value at “highest and best use” by market participants.

2) Orderly transaction
The transaction takes place in the principal market or, in the absence of a principal market, the most
advantageous market.

- The principal market is the market with the greatest volume and level of activity for the asset or
liability

- The most advantageous market is the market that maximises the amount that would be received
to sell the asset or minimises the amount that would be paid to transfer the liability, after taking
into account transaction costs and transport costs

Transaction costs must be considered when deciding the most advantageous market, but transaction
costs are excluded from fair value
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举个栗子：Asset X is sold in two markets, and there is no principal market.
哪个是 most advantageous market?
A: 27-2-4=$21
B: 26-2-1=$23

Fair value of Asset X?
26-1=$25
3) Market participants
• Market participants are buyers and sellers in the principal (or most advantageous) market. They are
independent, knowledgeable, able and willing to transact.
• Will seek to maximise fair value of asset (or minimise fair value of liability) (AASB 13 paragraph 22).
• Fair value based on assumptions of market participants who act in their economic best interest (AASB
13 paragraph 22).
• Need not identify specific market participants.
• Identify characteristics of market participants associated with:
– the particular asset or liability;
– the principal (or most advantageous market); and
– the types of market participants that would transact in that market (AASB 13 paragraph 23).

4) Price

• Fair value is an exit price
• Price may be directly observable or estimated using another valuation technique (AASB 13 paragraph
24).
– Fair value must not be adjusted for “transaction costs” (AASB 13 paragraphs 25).
– Transaction costs do not include transport costs. Transport costs deducted from price if location
is a characteristic of the asset (AASB 13 paragraph 26).
Market A
Price=$27
Advertising costs=$2
Transport costs=$4
Market B
Price=$26
Advertising costs=$2
Transport costs=$1
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2. Problems: ***

• Fair value can be unreliable, especially when there is no active market to provide evidence of fair
value.
• Fair values might not be relevant under some circumstances, and so recognition of unrealised gains
or losses might be misleading. (e.g. investments GFC)
• Concerns about the effect of fair value accounting on company contracts, such as management
remuneration contracts, debt covenants.


知识点 3: Choice of accounting policies

1. Choice by accounting standard setters

1) Ad hoc period (1970-1980): political, discussion and negotiation of accounting standards.
2) Conceptual framework period (1980-1987): rely on authority of framework
3) Harmonization period (mid 1990s): make similar
4) Convergence period (2002): IASB (make the same)

• When developing an accounting standard, standard setters must choose the most appropriate
policies from a range of alternatives.
• The 'most appropriate' choice is not always clear.
– Assistance from the Framework is limited.
• Historically the process has been very political and has required compromise.


2. Choice by financial report preparer

Why has choices?
1) Aspects of financial reporting are not covered in accounting standards
2) Accounting standards may contain alternative policies
3) Required to make judgement or estimates e.g. useful life and residual value
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3. Choice of accounting policy (AASB 108) Hierarchy of Guidance

Level AASB108 para
ref
Details Examples
1 7 See whether there’s specific AASB
standards that deals with our exact
transaction
AASB116 PPE
2 10+11(a) See whether there is a specific AASB
standard that deals with a similar
transaction
Interpretation 132 re website
costs can be applied to app
development costs
3 10+11(b) Refer to framework definition recognition
criteria and measurement rules
Prepayment (asset) vs
expense.
Concept of future economic
benefits
4 10+12 See whether you can find a U.S. standard
dealing with the issue
U.S. standards re mobile
phone contracts
5 10+12 Industry practice Mining industry


知识点 3: Creative accounting (window dressing)

1. Creative accounting
Is when accounting policies are made or chosen to ensure financial statements present the impression
desired by financial statement preparer. à unreliable financial statements

4 ways:
1) Choice of accounting policies (e.g. PPE, cost vs FV)
2) Estimates or predictions of future events (useful life or residual value; bad debt)
3) Disclosure of transactions or events (e.g. contingent liability)
4) Timing of transaction (e.g. contract with customers, recognize revenue too early)

2. Earning management

Managers use judgement in financial reporting and in structuring transactions to alter financial reports
to either mislead some stakeholders about the underlying economic performance of the company or
to influence contractual outcomes that depend on reporting accounting numbers.