measurement approaches

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Measurementapproaches



Measurement approach

Historical cost (HC)

Adjusted historical cost (AHC)

Replacement cost (RC)



Historical cost The historical cost of as asset can usually be determined

with exactitude so long as the records showing theamount paid for the assets are still available .

The historical cost of fixed assets purchase when newmay will be known but it will usually be impossible tosay what proportion of the original total cost should beregarded as being applicable to that portion of the assetswhich remain unused at a point in time .



Historical cost

For example :

Imagine that we are dealing with a two yearold car which cost 20000$ and which weexpect to have total life of five year .

The historical cost of the unused portion of

the car is three fifth of 20000=12000



Historical cost We will be aware of the difficulties the

determination of the historical cost of stockwhether stock should be valued on the basis of average FIFO ... .

The problem is even more acute when tradingstock involved work – in progress and in finishedgood as the question of the extent to whichoverhead should be included in the stock figuremust be considered similar problem arise whendetermining the cost of fixed assets which areconstructed by a firm for its own use.



Historical cost

There are assets which have been acquiredthrough barter or exchange a special casaof which are assets purchased in exchange

for share in the purchasing company . Yet further problem occur where a number

of assets purchase together for example :

Where a company purchases the net assetsto another company or unincorporate firm.



Historical cost

Any balancing represent the amount paidfor all assets and liabilities not separatelyidentified in the accounting system and is

described as good will . Such as allocation has traditionally been

made using valued at their replacementcost and liabilities being valued at their

face value .



Adjusted historical cost

We mean the method where by thehistorical cost of assets is taken to be itsoriginal acquisition cost adjusted to

account for change in the value orpurchasing power of money between thedate acquisition and the valuation date .

We must be added the problem involved in

reflecting the change in the value of money .



Adjusted historical cost This is done be using price index which is

attempt to measure the average change inprice over a period .

It must be remembered that this methoddoes not attempt to revalue the assets , itis money .

The adjusted historical cost method can be

constructed with those approaches underwhich assets are stated at the currentvalue .



Replacement cost

Is often referred to as an entry valuebecause it is the cost to the business of acquiring an assets .

In a crude term it may be defined as theestimated amount that would have to bepaid in order to replace the assets at thedate of valuation .



Replacement cost The definition includes the word “estimated”

because the exercise is hypothetical one in thatthe method is based on the question .

How much would it cost to replace this assetstoday .

The answer has to be found from an examinationof the circumstances prevailing in the market forthe assets under review , if the assets is identical

with those being traded in the market theestimated may be reasonably objective .



Replacement cost

W indicate some of the possibleapproaches at this stage :

1. Gross/net replacement cost .

2. Market comparison .

3. Replacement cost of inputs .



Gross/net replacement cost

The most common approach is to take thecost a new assets and then deduct anestimate of depreciation ,for example : if

assets is two year old and is expected tolast for another three year , then usingstraight line depreciation , the netreplacement cost is three fifth of the gross

replacement cost.



Market comparison

In the case of some used assets, such asmotor vehicles , the assets might bevalued by reference to the value of similar

used assets . The approach includes as subjective judgment element which is combined withthe reasonably objective comparison with

the market .



Replacement cost of inputs

It might be possible to determine an assetsreplacement cost by reference to the currentreplacement cost of the various input used in theconstruction of the assets .

The necessary labor input could be costed at thewage rate prevailing at the valuation date withsimilar procedures being applied to the other

inputs-raw material , bought – in component andoverheads .



Replacement cost of inputs Example : machine which is expected to operate

another 2000 hours , anew machine might have alife 4000 hours , and have operating cost lessthan those of the machine , in this case , the

replacement cost of old machine would be half the cost of the new machine less the presentvalue of the savings , In the operating costs , if there is good market in the second hand machine.

But if this is not the case the replacement costwill be based on the cost of anew machine afteradjusting for differences in capacity andoperating cost .



IAS : 40

Initial measurement

Investment property is initially measuredat cost .

Measurement subsequent to initialrecognition

IAS 40 permits enterprises to choose

between :1. A fair value model .

2. A cost model .



Fair value model

Investment properly is remeasured at fairvalue , which the property could beexchanged between knowledgeable ,

willing parties in an arms lengthtransaction

Gain or losses arising from changes in thefair value of investment property must be

included in net profit or loss for the period



Fair value model Fair value should reflect the actual market state

and circumstances as of the balance sheet date .IAS 40

The best evidence of fair value is normally given

by current prices on an active market for similarproperty in the same location and condition .

A different nature or subject to different conditionrecent prices on less active market withadjustment to reflect changes in economic

condition . With using discounted cash flow projection based

on estimates of future cash flow . IAS 40



Fair value model If an entity determine that the fair value of an

investment property is not reliably determinableon a continuing basis .

The entity shall measure that investmentproperty using the cost model in IAS 16

The residual value of the investment propertyshall be assumed to be zero .

The entity shall apply IAS 16 unit disposal of theinvestment property .

Where a property has previously been measuredat fair value , it should continue to be measuredat fair value until disposal , even if comparablemarket transactions become less frequent ormarket prices become less readily available .



Cost model

After initial recognition , investmentproperly is accounted for in accordancewith the cost model as set out in

property ,plant and equipment –cost lessaccumulated depreciation and lessaccumulated impairment losses . IAS 40



investment propertyclassification Transfers to or from ,investment property should only be made

when there is a change in use ,evidenced by : IAS 40

1. Commencement of owner-occupation (transfer from investmentproperty to owner –occupied property) .

2. Commencement of development with a view to sale (transfer frominvestment property to inventories) .

3. End of owner-occupation (transfer from owner-occupied propertyto investment property) .

4. Commencement of an operating lease to another party (transferfrom inventories to investment property) .

5. End of construction or development (transfer from property in thecourse of construction /development to investment property) .



accounting for transfersbetween categories:

For transfer from investment property carried at fair valueto owner-occupied property or inventories the fair value atchange of use is the cost

For transfer from owner-occupied property to investmentcarried at fair value

For transfer from inventories to investment property at fairvalue , any difference between faire value at date of transfer and it previous carrying amount should berecognized in net profit or loss for the period .

When an entity completes construction/development of aninvestment property that will be carried at fair value , anydifference between the fair value at the date of transferand the previous carrying amount should be recognized innet profit or loss for the period .

measurement approaches

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