ASSET

MEASUREMENT
 Intro
• Measurement practice for assets varies and reflects both
managers’ incentives and past accounting practices.
• We can investigate some of the issues relating to choice
of measurement methods considering measurement of
tangible/intangible assets and financial assets. The
choices relate to both measurement on acquisition and
measurement in subsequent periods.
 Intro-cntd
• Once measured the information about asset values can be
included in the financial statement (i.e. asset values are
recognized) or can be included as a note disclosure. In the
latter case asset remeasurements may be disclosed in the
notes to the accounts, but not recognized in the financial
statement.
 TANGIBLE ASSETS
• Traditional approach has been to measure assets at historical
cost which is firmly embedded in the US GAAP since the US
stock market crash of 1929 leading to the great depression.
• This position was held till 1978 when it was proposed that oil
and gas reserves be periodically revalued with changes in value
taken to the income statement.
 TANGIBLE ASSETS cntd
• The cost model reflects the conservative approach to asset measurement. Some
National GAAP favour the use of historical cost e.g. France and Germany
• Subsequent measurement based on historical cost implies that assets are
measured at acquisition cost less any accumulated depreciation and impairment
charges.
• Consistent with the traditional approach, losses in value of assets are recognized
in the financial statements but gains are not.
Why should managers choose
measurement model or another?
• The argument: revaluation as opposed to historical cost is less
persuasive if assets are recently purchased or not subject to
fluctuating market prices/inflation. Thus historical cost approach
is preferable in such circumstance.
• In case of inflation and changing market price revaluation
approach (fair value method) are preferable. E.g. Revaluing lands
in times of rising. Using revaluation method will implicate on
higher cost of revaluation due to the need to review asset prices
at the end of each financial year.
• Revaluation can provide more current information about value
than historical cost.
• Gains on remeasurement of assets resulting from the use of
revaluation models (IAS 16 para 31)were traditionally included
directly in equity. Assets were increased (debit assets) thus increasing
assets on the balance sheet and the credit entry went directly to an
asset revaluation reserve in equity (credit-asset revaluation reserve).
• The gain on asset were realized when sold.
Rovvide more current information
about value than historical cost.
 INTANGIBLE ASSET
• Assets are bundles of future economic benefits to be realized by an entity. They
could be tangible or intangible.
• Examples of intangible assets are company Brands and intellectual property.
• Accounting standards require that intangible assets be measured initially at cost
of acquisition(IAS 38 para 24).
• The use of current valuation is rare.
• IAS 38 (para 75) permits the revaluation model but like IAS 16,requies that the
fair value be determined with reference to an active market .
• Since most intangible assets by their very nature do not have an active market,
cost (less amortization and impairment) is the widely used measurement
method.
 FINANCIAL ASSETS
• IAS 39 Created a separate category of financial assets and
liabilities and introduced associated measurement rules.
• It is argued that historical cost principles are inappropriate to
measure some financial instruments. E.G. Derivatives which
have no cost. Over time their value can change significantly,
and under the cost models the changes in value would not be
recorded in the financial statements.
The FASB and IASB have concluded that derivatives should be
measured at fair value rather than cost.
In IAS 39 fair value is defined as… The amount for which an
asset could be exchanged or a liability settled, between
knowledgeable willing parties in an arms length’s transaction.
measured at fair value rather than cost.
Classification and Measurement of
Financial Instruments
TYPES OF FINANCIAL ASSETS MEASUREMENT METHOD

Original loans and receivables Amortised cost. The assets is not affected by the intention to sell or
hold to maturity
Held-to- maturity investments Amortised cost, subject to review for impairment in value. An entity
is prohibited from using the held to maturity classification if it sells
or transfers more than a small portion of its held to maturity
investment prior to maturity , during the current or preceding two
financial years.
Available for Sale securities Fair value with gains or losses from remeasurement recognized in
equity
Financial Assets held for trading or Fair value with gains and losses arising on remeasurement taken to
classified as fair value through profit profit and loss.
and loss and derivatives All financial assets carried at amortised cost and available for sale
securities are required to be assessed for impairment as each
reporting date.
Definition of some terms
Amortised Cost
• Amortised Cost means the amount recognised initially less principal
repayments plus or minus cumulative amortisation, using the
effective interest method, of the difference between initial amount
and maturity amount. Reductions for impairment or uncollectibility
are made where necessary.
• Amortisation is the action or process of gradually writing off the
initial cost of an asset or loan.
• It is an accounting technique used to periodically lower the book
value of a loan or an intangible asset over a set period of time.
Available-for-sale
• Available-for-sale (AFS) is an accounting term used to describe and
classify financial assets. It is a debt or equity security not classified as
a held-for-trading or held-to-maturity security—the two other kinds
of financial assets. AFS securities are nonstrategic and can usually
have a ready market price available.
Held-for-trading security
• A held-for-trading security is a debt or equity investment purchased
with the intention of short-term gain. ... On the balance sheet, held-
for-trading securities are considered current assets. Held-for-trading
securities are reported at fair value, and unrealized/gains or losses are
reflected in earnings.
Held-to-maturity
• Held-to-maturity (HTM) securities are purchased to be owned until
maturity. ... Held-to-maturity (HTM) securities provide investors with
a consistent stream of income; however, they are not ideal if an
investor anticipates needing cash in the short-term