Measurement of Elements of Financial Statements
Added on 2021-06-14
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MEASUREMENT IN THE STATEMENT OF FINANCIALPOSITION
Essay1The net worth of any entity can be computed by sum totalling the value of each asset ownedand deducting the value of liabilities thereon (Blundel, Lockett and Wang, 2017). Every assetand liability needs an effective system of valuation, i.e. the way they convert into liquidassets or liabilities and the variables influencing such system. The value at which assets andliabilities are measured will not only affect the amount of revenue and expenses of an entityand the other elements of the financial statements, but it is also critical in terms of financialreporting requirements and transparent business practices. Measurement bases of assets andliabilities may use either entry or exit values (Berger, 2018). In case of assets, entry valuesindicate the cost of purchases and exit values indicate the cost of sales or the value in use.And for liabilities entry values denote the amounts at which the liabilities are accepted by anentity, while the exit values refer to the amounts at which the obligations are fulfilled(Berger, 2018). A number of factors contribute towards selection of an appropriatemeasurement basis, for a particular asset or a liability. The five most popular measurementbases are classified on lines of historical cost, replacement cost, fair value, net realisablevalue and measurement of value in use. The measurement bases should be relevant andshould truly represent the assets and liabilities in the balance sheet and should be selectedonly after considering all the possible effects on the financial statements (Maynard, 2017, p.81). Also the measurement bases must be disclosed in the financial statements for the users tobe informed about the same as it significantly affects their analysis (Collings, 2016). Thefollowing segment describes various measurement bases and analysis of choice and effects ofdifferent measurement bases in case of Starbucks Corporation.Historical cost basis conventionally records the value of an asset at the price at which it wasoriginally acquired by the entity irrespective of significant changes that have occurred in itsvalue over time (Greenberg, et al., 2013). This is inclusive of all the transaction costsincurred to bring the asset to use such as the shipping or delivery charges, set up or
Essay2installation cost, training fees and so on. This basis works on the principle of realization i.e.the revenues must be recorded in the financial statements only when realised actually, untilthen the assets must be carried on their respective historical costs (Atrill, Harvey andMcLaney, 2011). The original cost of the asset is recorded on the asset side of the statementof financial position and it remains the same till the time asset is owned by the entity.Though, the changes pertaining to obsolescence and deterioration are accounted for byproviding for depreciation expense in the statement of profit and loss, distributed over theuseful life of the asset. The most striking feature of this basis is that valuation is free frompersonal judgements and the cost transaction can be easily traced via invoices. Also the basisis cost effective in terms of its implementation and management. One of the limitations ofthis basis is that it does not considers the inflation rates and current economic opportunities.Therefore, historical costs tend to lose their relevance as time passes and opportunitieschange (Wahlen, Baginski and Bradshaw, 2017). Another limitation is that the depreciation ischarged on the basis of the original asset cost, and not on the acquisition cost for the sameasset. And therefore, the provision made for the replacement of the asset by way ofdepreciation may not be sufficient in light of inflation.Replacement cost refers to the cost, an organization is required to pay in order to replace anasset today i.e. amount to be incurred to replace the current asset with a similar asset (Weil,Schipper and Francis, 2013). It does not necessarily be the same as market value of the asset;this is because replacement cost depends on the asset’s present condition of use. When assetsenter into the organization, they can either take the form of original cost or the replacementcost. The adjustments for deterioration and obsolescence are made to arrive at the correct andrelevant replacement costs of the assets. The steps to computing the replacement cost aredescribed in the following segment. Firstly, determine the total cost required to be incurredfor acquisition of the similar asset including the transaction costs if any. Then account for the
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