Answered

Discover a world of knowledge and community-driven answers at IDNLearn.com today. Ask your questions and receive prompt, detailed answers from our experienced and knowledgeable community members.

Financial statements are inexorably moving to a model where all assets and liabilities will be measured on the basis of fair value rather than historical cost.
Required:
a. Discuss the conceptual differences between historical cost and fair value.
b. Discuss the merits and demerits of the two alternative measurement models.
c. What types of assets (or liabilities) more readily lend themselves to fair value measurements? Can we visualize a scenario where all assets are measured using fair value?
d. What are the likely effects of adopting the fair value model on reported income?

Sagot :

Zvikoidn

Answer:

Part a

historical cost = this is when we carry assets and liabilities at cost less accumulated depreciation or amortization.

fair value = this is when we carry assets and liabilities at amount that they could be exchanged for at arms length between market participants

Part b

Historical Cost

Merits : Value are easy to obtain since they are generated internally

Demerits : Is not very accurate.

Fair Value

Merits : Accurate method as it reflects market situation

Demerit : Costly as data and information is obtained externally

Part c

Assets : Investment Property and Financial assets measured through Profit and Loss

Liabilities : Bonds

Part d

Income is shown more accurately and eliminates biases form estimates.

Explanation:

Historical Method carries assets and liabilities at cost less accumulated depreciation or amortization while Fair Value Model carries assets and liabilities at amount that they could be exchanged for at arms length between market participants

We value your presence here. Keep sharing knowledge and helping others find the answers they need. This community is the perfect place to learn together. Thank you for visiting IDNLearn.com. We’re here to provide clear and concise answers, so visit us again soon.