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ACCT20074 Contemporary Accounting Theory

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Question:

  1. Undertake a review of literature to describe the meaning, objective and significance of measurement in accounting.
  2. Explain in detail what qualitative characteristics are necessary to be judged in selecting measurement approaches.
  3. Distinguish between the accounting concept and economic concept of income measurement.
  4. Based on your study of the IASB’s conceptual framework, explain what measurement bases have been prescribed for the measurement of the items of financial statements.
  5. Based upon a review of literature, compare and contrast the four major measurement bases other than the fair value accounting (FVA).
  6. Consider the following items of Andaman Enterprise for the year ended 31 December 2019:

Opening net monetary assets

$  (15000)

Sales

210,000

Purchase of goods

(105,000)

Payment of interest

(2,500)

Payment of administrative expenses

(10,000)

Tax expense

(25,000)

Dividends

(12,000)

 

In the same year, the general price level index for all these items was 135/130.

Under the assumptions of CPPA, you are required to:

  1. Compare the unadjusted and adjusted prices.
  2. Calculate the value of unadjusted and adjusted net closing monetary assets.
  3. Calculate the net profit or loss at the end of the year and compare the purchasing power to explain how much more or less the firm would have needed to have the same purchasing power they had at the commencement of the year.
  4. On the basis of IFRS 13, explain the fair value hierarchy. Also undertake a review of literature to critically appreciate the assumptions of fair value hierarchy.
  5. Refer to the ASX company allocated to you. Read the balance sheet (statement of financial position), income statement (statement of financial performance) and relevant notes to the accounts. On the basis of careful reading of these three parts of financial statements, explain the measurement bases applied for different items of these financial statements.

Note: Choosen Company is Regis Resources

Required:

Prepare a report responding to the above questions. Your assessment will also be marked on the basis of your depth of knowledge, executive summary, introduction, conclusion, references and quality of presentation of research report.

 

Answer:

Introduction

The primary focus of the assessment is to formulate a detailed study regarding concepts of measurement and the relevance of the same in the process of accounting. The accountants consider measurement of financial information to be an integral part of the accounting system. The assessment would be looking into the IASB framework for the purpose of reporting and measuring financial aspects of the business (Reports. 2020). The analysis further reveals important measurement techniques which can be used for accounting and reporting purposes. In order to effectively analysis measuring criteria for a business, the business of Regis Resources would be considered. The most recent annual report for the company is considered so that the measurement criteria for the business are being followed. The different items of the financial statements and the measurement criteria which is followed by the business is also considered.

Measurement in Accounting

The principle of measurement is a very important concept for the purpose of presenting the financial information so that the investors can take important decisions on the basis of information. The framework which is specified by IASB properly states that an item which is consistent with the definition of an element of financial statements should be recognised in the statements if it has a cost or value that can be measured with reliability (Barker & Teixeira, 2018). The framework gives importance to the fact that proper measurement is required for different items so that information can be relevant and useful for the users of the financial statements. The process of measurement is aptly described in the IFRS framework as the process of determining the monetary amounts at which the elements of financial statements are to be recognised for the sake of reporting key financial information for the business (IFRS 13 — Fair Value Measurement. 2020). The implications of measurement from the perspective of financial reporting are quite important and therefore every company must consider the same while presenting vital information regarding the performance of the business.

The main motive behind accounting is to properly classify and summarise financial information which is only possible if the information are measurable and therefore it can be said aptly that measurement forms one of the disciplines in accounting. The measurement criteria allows the management of the company to properly value transactions and certain assets and liabilities which are imperative for the business so that overall financial position of the business can be demonstrated appropriately. The measurement concept relies on the fact that whether financial information has some costs or value associated with the same and on the basis of the same, information are presented in the financial reports for the company (Gebhardt, Mora & Wagenhofer, 2014).. This has been specified in the IASB framework of reporting so that proper guidelines are available to the company while reporting their performance. It is to be remembered that accounting also serves as a tool for the investors as it helps companies in presenting financial information on the basis of which decisions relating to investments are made by the company. Therefore, it can be said appropriately that measurement is very important concept which can help businesses to project the financial information of the company.

 

Qualitative Characteristics of Measurement Principles

The measurement criteria which is used by a business for the purpose of revealing qualitative information which is processed by the business so that relevant information are covered in the financial statements of the business. The relevant information which is covered in the financial statements are based on the measurement principle and different measurement approaches are listed below in details:

  • User Specific Factors: The information which is available to the users of the financial reports should be specific context related and the same should also be measurable. This is an important aspect for the business as the measurement criteria would not be of any use if the same is not measurable properly (Carvalho, & Salotti, 2013).. The users of the financial statements should have proper access to the financial information which can be measured properly to some extent.
  • Relevance: The information which is portrayed and also the measuring criteria which is used should be relevant from the perspective of the users of the financial statements. This is the primary basis on which major decisions relating to investments are undertaken by the users. It is for such reason that this factor is considered to be significantly important for a business.
  • Reliability: The measurement technique which is applied by the senior officials should be reliable. It means that the management should be able to depend on the information so that accurate and proper analysis can be conducted. The reliability of measuring technique also promotes consistency in the financial reporting practices of the business (Busso, 2014). Therefore, it can be said that the factor is very important from the perspective of operations of the business.
  • Comparability and Consistency: Any business organization which is preparing financial statements would look to maintain consistency and comparability factors so that proper assessment can be made between past techniques and present techniques. It is no different in the case of different measurement techniques (Verriest, Gaeremynck & Thornton, 2013). It is also to be noted that these two factors are quite important for decision making process based on the financial information included in the annual reports.
  • Materiality: The information which is presented in the financial statement must be material and should portray correct financial information. The measurement technique which is used should reveal material information so that it can be o assistance to the users as well as the management for taking a course of action. The factors of relevance and reliability are closely related with the factor of materiality.
 

Distinction between the accounting concept and economic concept 

The accounting concept of profit does not recognise unrealized gains and losses for a period and therefore only presents realized gains and losses. The accounting profits are demonstrated in the annual reports of a company and the same is used by users of the financial statements to estimate the performance of the business in the market. The accounting concept of income considers market prices which may be current or past for estimating the income which is to be reported in the financial reports of the business. On the other hand, economic profits considers all types of gains and losses even the ones which have not been realized yet which means that opportunity costs are also considered within the scope of the concept (Nichols, Street & Tarca, 2013). The economic concept of profits considers future value of cash flows and therefore predictions of future flows of an income is considered for analysis. The approach which is used in economic concept of profits is basically forward looking approach while the same is backward looking in the case of estimating the accounting concept of profits.

The analysis which is presented above shows the differences which exist between the two concepts and why it is not possible to portray economic concept of profits in the books of accounts (Agyei-Mensah, 2013). In the same manner, the accounting concept of profit have different applications but the same cannot be used reliably as economic concept of profits.

Measurement Basis Prescribed by IASB’s Conceptual Framework

The measurement requirement for a business so that proper transparency and integrity is maintained, is specified by the IASB. The IASB also regulates the conceptual framework and bring about necessary changes as and when required for simplicity and more transparency. The different approaches which are suggested by IASB framework for proper reporting are listed below:

  1. Historical costs method: The historical cost method is an accounting method in which the assets of the firm are recorded in the books of accounts at the same value at which it was first purchased. The assets and liabilities for the business are recorded in the same value in the financial statements.
  2. Value to the Business: The value to the business for the asset is considered as the main measurement criteria in this situation. The method considers the aspect carefully that if the business is deprived of the asset than what will happen. The value to the business is quite a useful technique for measuring the assets and liabilities of the business.
  3. Fair Value: Fair value refers to the actual value of an asset which can be any asset that is agreed upon by both the seller and the buyer. Fair value is applicable to a product that is sold or traded in the market where it belongs or under normal conditions. This is considered to be the most popular form of measurement technique which is applied by a business.
  4. Realisable Value: This is the value for which the asset or the liability can be sold or settled between knowledgeable parties. The value at which the asset or liability is reported under this method is known as net realizable value.
  5. Value in Use: The value in use of an asset or liability is the discounted value of the future cash flows attributable to the asset. This method is basically used for businesses units rather than assets and liabilities of the business.
 

Contrast Between the different Methods

The contrast between the four most used measurement techniques for a business are appropriately presented below in details so that proper assessment can be made regarding the aspect of measurement in terms of financial reporting:

Historical Costs Method

As per this method, the assets of the firm are recorded in the books of accounts at the same value at which it was first purchased. The assets and liabilities for the business are recorded in the same value in the financial statements. The method also considers that the recoverable amount from the asset should not exceed the historical costs of the asset (Tsalavoutas & Dionysiou, 2014). This is done so that an accurate presentation of the financial information can be portrayed in the annual report. In this method, the assets are recorded in the balance sheet at the original costs when the asset was acquired.

Fair Value Method

The fair value measurement for the financial information considers the value of exchange which must be considered by market participants for purchasing the assets of the business. Fair value refers to the actual value of an asset which can be any asset that is agreed upon by both the seller and the buyer. Fair value is applicable to a product that is sold or traded in the market where it belongs or under normal conditions. However, the method still faces some criticism which is mainly due to the limited application of the method  in the process of accounting. Fair value is also likely to be volatile, and could therefore be regarded as misleading for the purpose of valuation.

Value to the Business

Value in the business basically allows the management to make measure the asset on the gains which is attributable from the use of the asset. A business needs to value the assets of the business and the same should be recognised and measured in the same way as for any other asset. This method would be useful than other methods when a business replaces an asses with an asset which has a similar use or potential (Kanodia & Sapra, 2016). This method can appropriately measure the asset in such a case. The relevance for using this method might be much more in certain cases which make the entire process much more effective.

Realizable Value Method

The realizable value method appropriately considers the value at which the asset can be sold in the market less the estimated costs which is associated with the assets of te business. The method is appropriately used for estimating the value of inventory which a business possesses (Page, 2014). The method which can be used for appropriately showing the certain group for assets but the same does not have universal applications and the limited application also depend on the judgement of the management of the company.

Unadjusted and Adjusted Closing Price

The unadjusted closing price can be referred to the as the closing price of stocks and securities at the last date of the closing period and this is often considered for the purpose of measurement. On the other hand, Adjusted closing price refers to the price which is computed after considering factors such as dividends, stock splits and new stock offerings. The adjusted closing price is a more accurate presentation of the financial situation of the business.

Statement Showing Monetary Assets value

Particular

Amt $

Opening net monetary assets

-15000

Sales

210000

Purchase of goods

-105000

Payment of interest

-2500

Payment of administrative expenses

-10000

Tax expense

-25000

Dividends

-12000

Closing net monetary assets

40500

Adjusted Closing net monetary assets

42057.69

 

Profit and Loss Statement

Particular

Amt $

Sales

210000

less: Purchase of goods

-105000

Gross Profit

105000

Less: Operating Expenses

 

Payment of interest

-2500

Payment of administrative expenses

-10000

Tax expense

-25000

Dividends

-12000

Net Profit

55500

Unadjsuted Net Profit

57634.61538

 

The net profit which is demonstrated for adjusted figures are shown to be higher which is due to the fact that such figures are multiplied by general price index which is one of the main considerations for the calculations. The management of the business needs to work on the sales so that the same increases in the same proportion as the purchasing power considering the case presented in previous year.

 

Assumptions of Fair Value 

As per the provisions of IFRS 13, Fair value hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. . IFRS 13 has been issued so that proper assessment can be made in regards to fair value accounting process of a business.  The assumptions which are considered under the Fair value hierarchy are appropriately explained below:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. The quoted price which is applicable in the market is considered for analysis. Level 2 inputs on the other hand, are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs inputs are unobservable inputs for the asset or liability.

Analysis of Regis Resources limited

In order to make proper estimation of the measurement criteria which is followed by the business of Regis Resources , the annual report for the company for 2019 is considered. The note to accounts section presents information about the Group’s exposure to each of the above risks and its objectives, policies and processes for measuring and managing risk. These risks affect the fair value measurements applied by the Group. The disclosures show that the management of the company has appropriately listed the three levels of assets so that accuracy is maintained in the financial statements of the business which is sign that the management follows fair value hierarchy. The financial statement of the business is prepared following historical cost conventions especially for measuring the non-current assets of the business with a view to be consistent with the accounting practices which are followed in the organization. The management of the company considers the valuation and appropriate measurement of the assets an important part of the analysis of the business.

Conclusion

The above discussion takes a detailed study on different measurement methods which is used by management of a company so that appropriate financial information are presented. The discussion shows the measurement principles which are allowed by IFRS framework and which could be followed by businesses for appropriate presentation of the financial information of a business. The analysis further shows the fair value hierarchy for key assets which is stated in IFRS 13 so that appropriate financial reports can be formulated. The analysis further shows measurement aspects for Regis Resources Ltd so that proper clarity is available for the purpose of estimation. The analysis appropriately shows the reporting framework which is used for the purpose of reporting.

 

References

Agyei-Mensah, B. K. (2013). Adoption of international financial reporting standards (IFRS) in Ghana and the quality of financial statement disclosures. Macrothink Institute, International Journal of Accounting and Financial Reporting, ISSN, 2162-3082.

Barker, R., & Teixeira, A. (2018). Gaps in the IFRS conceptual framework. Accounting in Europe, 15(2), 153-166.

Busso, D. (2014). Does IFRS 13 Improve the Disclosure of the Fair Value Measurement? An empirical analysis of the real estate sector in Europe. GSTF Journal on Business Review (GBR), 3(4).

Carvalho, L. N., & Salotti, B. M. (2013). Adoption of IFRS in Brazil and the consequences to accounting education. Issues in Accounting Education, 28(2), 235-242.

Gebhardt, G., Mora, A., & Wagenhofer, A. (2014). Revisiting the fundamental concepts of IFRS. Abacus, 50(1), 107-116.

IFRS 13 — Fair Value Measurement. (2020). Iasplus.com. Retrieved 3 June 2020, from https://www.iasplus.com/en/standards/ifrs/ifrs13

Nichols, N. B., Street, D. L., & Tarca, A. (2013). The impact of segment reporting under the IFRS 8 and SFAS 131 management approach: A research review. Journal of International Financial Management & Accounting, 24(3), 261-312.

Page, M. (2014). Business models as a basis for regulation of financial reporting. Journal of Management & Governance, 18(3), 683-695.

Reports. (2020). Regisresources.com.au. Retrieved 3 June 2020, from https://www.regisresources.com.au/category/9-annual-reports-2.html

Tsalavoutas, I., & Dionysiou, D. (2014). Value relevance of IFRS mandatory disclosure requirements. Journal of Applied Accounting Research.

Verriest, A., Gaeremynck, A., & Thornton, D. B. (2013). The impact of corporate governance on IFRS adoption choices. European accounting review, 22(1), 39-77.

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