CORPORATE ACCOUNTING AND REPORTING THEORY

AASB 13 Fair Value Measurement” provides the framework in order to gauge fair value, which could be applied to various other standards. Fair value is the measure, which ascertains the amount to be received for selling an asset or paid for transferring a liability in an orderly transaction between the market participants at the date of measurement.

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Corporate Accounting and Reporting
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Table of Contents
Answer to Part A:...............................................................................................................2
Introduction:...................................................................................................................2
Explanation of the accounting standard (AASB 13) on fair value measurement:.........2
Conclusion:.....................................................................................................................5
Answer to Part B:...............................................................................................................5
References:........................................................................................................................7

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Answer to Part A:
Introduction:
“AASB 13 Fair Value Measurement” provides the framework in order to gauge
fair value, which could be applied to various other standards. Fair value is the measure,
which ascertains the amount to be received for selling an asset or paid for transferring a
liability in an orderly transaction between the market participants at the date of
measurement. The application of fair value is made in other standards like “AASB 138
Intangible Assets”, “AASB 3 Business Combinations” and “AASB 116 Property, Plant
and Equipment”. This essay would provide an overview of AASB 13, which is the
accounting standard for measuring fair value in Australia.
Explanation of the accounting standard (AASB 13) on fair value measurement:
Fair value measurement is dependent on the price, which would be obtained for
selling an asset or incurred for transferring a liability orderly. It is utilised for ascertaining
the exit price of an accounting instrument for a market participant owning the asset or
incurred the liability (Abbott and Tan‐Kantor 2018). According to “Paragraph 62 of
AASB 13”, there are three valuation methods, which could be utilised for ascertaining
fair value (Aasb.gov.au 2019). The initial method is the valuation method that takes into
consideration the useful lives of the assets coupled with market information of
comparable or identical items. The second method is the cost approach, which
computes the replacement value associated with the asset. The final method is the
income approach that discounts the estimated future cash flows to a present value
depending on existing market expectations.

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There has been recognition of a business combination under “Paragraph 3 of
AASB 3” at the time any transaction or other event results in the acquisition of liabilities
and assets constituting a business. In addition, according to “Paragraph 18 of AASB
3”, the items would be realised at the fair values of their dates of acquisition by the
acquirer (Aasb.gov.au 2019). Based on such realisation, the acquiree would realise
would realise the transfer of consideration at the fair value of its acquired date. as per
“Paragraph 37 of AASB 3”. At the time of determining the date of acquisition, the
parties are required to analyse the date on which there has been transfer of control from
the acquiree to the acquirer. If it is not possible to ascertain fair value before the end of
the accounting year, it is necessary to recognise provisional amounts depending on
reasonable estimates in compliance with “Paragraph 45 of AASB 3”.
As per “Paragraph 15 of AASB 116”, property, plant and equipment (PPE) like
machinery and land are need to be gauged at cost in the initial stage. An organisation
could select measuring classes of PPE in accordance with revaluation model or cost
model (Bond, Govendir and Wells 2016). In case of cost model, an item of PPE is to be
measured at cost after deduction of accumulated impairment losses and accumulated
depreciation. For revaluation model, an item of PPE is to be carried at re-valued
amount, which is the fair value at the revaluation date after deduction of accumulated
impairment losses and accumulated depreciation (Aasb.gov.au 2019).
AASB 13 points out three key elements of fair value, which include current exit
price, orderly transactions and market participants. In this context, it needs to be
mentioned that exit price could be defined as the price, which would be obtained for
selling an asset or incurred for transferring a liability (Dunbar and Laing 2017). The

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second element is orderly transaction, in which market exposure is assumed for a
period before the date of measurement to enable for usual marketing activities and
customary for transactions engaging such assets or liabilities and it is not compelled.
The final element is the market participants, which are categorised in the form of buyers
and sellers in the principal or most beneficial market for asset or liability. Such asset or
liability needs to be knowledgeable, independent, ability and willingness to enter into the
transaction (Palea 2014).
The other important aspects of AASB 13 include transaction cost and transport
cost. According to AASB 13, transaction costs are defined as incremental direct costs
for transferring liability or selling asset in the principal or most beneficial market. On the
other hand, transport costs could be defined as those costs, which would be needed for
moving an asset from its existing location to the principal or most beneficial market. The
use of both transaction cost and transport cost is made for ascertaining the most
beneficial market; however, only transport costs are subtracted to ascertain fair value.
Moreover, AASB 13 lays stress on the measurement of non-financial assets as
well. An organisation needs to follow four steps so that they could gauge the fair values
of non-financial assets. The first step involves the type of the asset, which is to be
measured. In this case, the noteworthy features include location, condition, restrictions
on use or sale and whether the asset is a class of assets or stand-alone asset (Yao,
Percy and Hu 2015). The second step is to ascertain the suitable measurement premise
related to valuation. The next step is to find out the market having the largest volume
and activity level for the asset and in case, there is no principal market, the most
beneficial market would be considered. Finally, the organisations need to determine the

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valuation methods for measuring the fair values of assets, which include cost approach,
market approach and income approach mentioned under Level 1, 2 and 3 Inputs in
AASB 13.
Conclusion:
Despite the fact that fair value measurement has been criticised after financial
crisis, it is still deemed to be useful, as the other methods could not perform better than
this measure. When any organisation faces issues in estimating fair values, it is advised
to extend disclosure of the underlying assumptions to users irrespective of Level 1, 2
and 3 inputs. For enhancing the measurement, the regulators need to keep changing
and issuing standards associated with fair value measurement along with fixing
imperfections in the system. Finally, the standard setters could investigate the efficacy
and usefulness of fair value among various organisations.
Answer to Part B:

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References:
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed 21
Jan. 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 21 Jan.
2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-
18.pdf [Accessed 21 Jan. 2019].
Abbott, M. and Tan‐Kantor, A., 2018. Fair Value Measurement and Mandated
Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian
Accounting Review, 28(2), pp.266-278.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by
Australian firms and whether they were impacted by AASB 136. Accounting &
Finance, 56(1), pp.259-288.
Dunbar, K. and Laing, G.K., 2017. Deconstructing the Accounting Standard AASB 13
Fair Value: Exit vs Entry Price for Assets. Journal of New Business Ideas &
Trends, 15(2), pp.105-114.

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Palea, V., 2014. Fair value accounting and its usefulness to financial statement
users. Journal of Financial Reporting and Accounting, 12(2), pp.102-116.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets
and audit fees: Evidence from Australian companies. Journal of Contemporary
Accounting & Economics, 11(1), pp.31-45.