Measurement

approaches
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 the
amount paid for the assets are still available .

 The historical cost of fixed assets purchase when new

may will be known but it will usually be impossible to
say what proportion of the original total cost should be
regarded as being applicable to that portion of the assets
which remain unused at a point in time .
Historical cost
 For example :

Imagine that we are dealing with a two year

old car which cost 20000$ and which we
expect 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 stock
whether stock should be valued on the basis of
average FIFO ... .

 The problem is even more acute when trading

stock involved work – in progress and in finished
good as the question of the extent to which
overhead should be included in the stock figure
must be considered similar problem arise when
determining the cost of fixed assets which are
constructed by a firm for its own use.
Historical cost
 There are assets which have been acquired
through barter or exchange a special casa
of 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 assets
to another company or unincorporate firm.
Historical cost
 Any balancing represent the amount paid
for all assets and liabilities not separately
identified in the accounting system and is
described as good will .
 Such as allocation has traditionally been
made using valued at their replacement
cost and liabilities being valued at their
face value .
Adjusted historical cost
 We mean the method where by the
historical cost of assets is taken to be its
original acquisition cost adjusted to
account for change in the value or
purchasing power of money between the
date 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 in
price over a period .
 It must be remembered that this method
does not attempt to revalue the assets , it
is money .
 The adjusted historical cost method can be
constructed with those approaches under
which assets are stated at the current
value .
Replacement cost
 Is often referred to as an entry value
because it is the cost to the business of
acquiring an assets .
 In a crude term it may be defined as the
estimated amount that would have to be
paid in order to replace the assets at the
date of valuation .
Replacement cost
 The definition includes the word “estimated”
because the exercise is hypothetical one in that
the method is based on the question .
 How much would it cost to replace this assets
today .
 The answer has to be found from an examination
of the circumstances prevailing in the market for
the assets under review , if the assets is identical
with those being traded in the market the
estimated may be reasonably objective .
Replacement cost
 W indicate some of the possible
approaches 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 the
cost a new assets and then deduct an
estimate of depreciation ,for example : if
assets is two year old and is expected to
last for another three year , then using
straight line depreciation , the net
replacement cost is three fifth of the gross
replacement cost.
Market comparison
 In the case of some used assets, such as
motor vehicles , the assets might be
valued by reference to the value of similar
used assets .
 The approach includes as subjective
judgment element which is combined with
the reasonably objective comparison with
the market .
Replacement cost of inputs
 It might be possible to determine an assets
replacement cost by reference to the current
replacement cost of the various input used in the
construction of the assets .
 The necessary labor input could be costed at the
wage rate prevailing at the valuation date with
similar procedures being applied to the other
inputs-raw material , bought – in component and
overheads .
Replacement cost of inputs
 Example : machine which is expected to operate
another 2000 hours , anew machine might have a
life 4000 hours , and have operating cost less
than those of the machine , in this case , the
replacement cost of old machine would be half
the cost of the new machine less the present
value 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 cost
will be based on the cost of anew machine after
adjusting for differences in capacity and
operating cost .
IAS : 40
Initial measurement
 Investment property is initially measured
at cost .
Measurement subsequent to initial
recognition
 IAS 40 permits enterprises to choose
between :
1. A fair value model .
2. A cost model .
Fair value model
 Investment properly is remeasured at fair
value , which the property could be
exchanged between knowledgeable ,
willing parties in an arms length
transaction
 Gain or losses arising from changes in the
fair 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 similar
property in the same location and condition .
 A different nature or subject to different condition
recent prices on less active market with
adjustment 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 determinable
on a continuing basis .
 The entity shall measure that investment
property using the cost model in IAS 16
 The residual value of the investment property
shall be assumed to be zero .
 The entity shall apply IAS 16 unit disposal of the
investment property .
 Where a property has previously been measured
at fair value , it should continue to be measured
at fair value until disposal , even if comparable
market transactions become less frequent or
market prices become less readily available .
Cost model
 After initial recognition , investment
properly is accounted for in accordance
with the cost model as set out in
property ,plant and equipment –cost less
accumulated depreciation and less
accumulated impairment losses . IAS 40
Transfers to or from
investment property
classification
 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 investment
property to owner –occupied property) .
2. Commencement of development with a view to sale (transfer from
investment property to inventories) .
3. End of owner-occupation (transfer from owner-occupied property
to investment property) .
4. Commencement of an operating lease to another party (transfer
from inventories to investment property) .
5. End of construction or development (transfer from property in the
course of construction /development to investment property) .
The following rules apply for
accounting for transfers
:between categories
 For transfer from investment property carried at fair value
to owner-occupied property or inventories the fair value at
change of use is the cost
 For transfer from owner-occupied property to investment
carried at fair value
 For transfer from inventories to investment property at fair
value , any difference between faire value at date of
transfer and it previous carrying amount should be
recognized in net profit or loss for the period .
 When an entity completes construction/development of an
investment property that will be carried at fair value , any
difference between the fair value at the date of transfer
and the previous carrying amount should be recognized in
net profit or loss for the period .