MA601: Theory and Current Accounting Issues: Measurement Bases

This report, prepared for a course on accounting theory and current issues, delves into the crucial aspects of asset recognition and measurement within the accounting framework. It differentiates between the processes of recognizing and measuring assets, emphasizing their significance in financial reporting. The study explores the strengths and shortcomings of different measurement bases, including historical cost, current replacement cost, realizable value, and present value. It contrasts value-in-use and value-in-exchange, highlighting their roles in assessing customer satisfaction and asset valuation. The report provides arguments supporting these measurement bases and discusses the relevance of historical cost in financial statements. Ultimately, the report concludes by acknowledging the ongoing debates surrounding these measurement bases, emphasizing the continued prevalence of certain methods despite associated criticisms, providing valuable insights for students using Desklib.

Running head: THEORY AND CURRENT ACCOUNTING ISSUES
THEORY AND CURRENT ACCOUNTING ISSUES
Name of the student
Name of the University
Author Note

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THEORY AND CURRENT ACCOUNTING ISSUES
Table of Contents
Executive Summary...................................................................................................................3
1. Introduction............................................................................................................................4
2. Discussion..............................................................................................................................4
2.1 How recognition and measurement of assets are different?.............................................4
2.2 Essential components of the measurement of assets........................................................5
2.2.1 Historical Cost method...........................................................................................5
2.2.2 Current replacement Cost method........................................................................5
2.2.3 Realizable value concept.........................................................................................5
2.2.4 Present value concept................................................................................................6
2.3 How value-in-use and value-in-exchange are different?.................................................6
2.4 Strengths and shortcomings of different measurement bases..........................................7
2.5. Arguments to support the measurement bases................................................................8
2.6. Relevance of historical cost in financial statement.........................................................9
3. Conclusion............................................................................................................................10
4. References............................................................................................................................12

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Executive Summary
The study aims at differentiating between the recognition and measurement of assets. It
studies the significance of these two concepts in accounting. The approach of the study is to
highlight the major significance and shortcomings of different measurement bases which are
historical cost, current replacement cost, present value and realizable value. The study also
differentiates between value-in-use and value-in-exchange which are two major categories of
measuring customer satisfaction. Lastly, the report concludes that in spite of the various
criticism and arguments raised against measurement bases, some of them are still used widely
in comparison to others.

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1. Introduction
Recognition of asset and measurement of an asset are two main aspects of accounting.
Several researchers have made some research on the importance of these two aspects and
how the different method of measurement of assets is significant in accounting in their own
way. Basis of accrual concept, matching principle and going concern principle support the
study made in this report. As per the International Accounting Standards Board, an asset is an
important element of financial statement. The asset should be recognized and recorded for the
benefits, it will render to the entity. Moreover, IASB also states the legal aspect of
recognition and measurement of assets. It states an asset must be recorded when there is a
probability of generating economic benefits from it. Secondly, the cost at which the asset is
purchased is capable of being represented in values and which can be measured easily and
reliably. Thus, it helps in presenting a fair view of the financial position of the entity.
2. Discussion
2.1 How recognition and measurement of assets are different?
 Recognition is the method of recording financial items in financial statements.
Revenue recognition means recording revenue in the period to which they belong or
earned and not in the period in which they are received. Similarly, recognition of
assets means identifying financial items such as assets or liabilities and recording
them in the financial statement. Recognition of assets means recording assets when
there is a probability that the assets are going to generate revenue in the future
(Rahman, 2017). If the chances of generating revenue are negligible, then these assets
will be considered as an expenditure for the current year only and not recorded as an
asset.

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 Recognition means identifying the nature of the item while a measurement is valuing
the item. Recognition of assets identifies the assets, i.e., items should be recorded
under which category of assets. While the measurement of assets means measuring or
determining the assets at fair value or to the cost which is accumulated after charging
depreciation or amortization (amortized cost) (Setyasalm & Muflikhati, 2019).
 Recognition of assets ensures that assets that are recorded in the financial statements
are measurable, like customer loyalty cannot be measured; hence it is not recognized
as an asset. Measurement of assets can be done on the basis of certain concepts such
as historical concept, current cost concept and present value- realizable value concept.
2.2 Essential components of the measurement of assets
Measurement of assets is a way to determine the cost value at which the assets are
identified and recorded in the financial statement of a business. The different components of
measuring the value of the assets are discussed below:
2.2.1 Historical Cost method- This component is an important element of measurement of
assets, and the valuation of an asset is done at its original cost on the balance sheet at the time
when it is taken over by the company or an entity (Tkachuk, 2019). This historical cost
method is mainly used for the measurement purpose of fixed assets.
2.2.2 Current replacement Cost method- In this method, the valuation of the assets are
done at the current market price, and not on the historical cost at which the assets were
purchased. It displays the depreciated value of the tangible assets and not the cost incurred
during the purchase of fixed assets.
2.2.3 Realizable value concept- Another important element of measuring the value of an
asset is Realizable value or can be said as the settlement value. The valuation of the asset is

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done at a cost that can be achieved currently by selling the asset at a reasonable market price
offered and without having any pressure of time to sell them.
2.2.4 Present value concept- Another component of measurement is the Present value (PV).
The present value of assets are calculated by discounting the future net cash flows value of
asset (Adusumilli, Davis & Fromme, 2016).
2.3 How value-in-use and value-in-exchange are different?
 Value-in-use is considered as a benefit that comes out from a commodity for a
particular individual, which has the capacity to satisfy them (Sakao, Wasserbaur &
Mathieux, 2019). Value-in-use is derived from a product by reaching its satisfaction
level when a particular consumer makes the consumption of that specified product.
On the other way, the value-in-exchange deals with the value or quantity of goods and
services which can be acquired by someone from the market in exchange for a
specific thing. The value-in-exchange mainly depends on two aspects which are Time
and Place.
i. Time- Value in exchange focuses on Time component as with the course of time, the
exchange value of a commodity differs from the other commodity.
ii. Place- Another component of value in exchange is place. For any specific product,
the exchange value differs in terms of a place like it differs from one place to another
place or market.
 In the value-in-use concept, the value is measured in terms of quality, as it emphasizes
on what quality is served to the person, whether the value has the capability to satisfy
the individual’s need and want which is derived from the consumption of commodity
by the individual. Value-in-exchange is a totally quantity related concept where it
depicts the picture relating to the quantity of commodity one can get in exchange for
some other commodity (Taylor, Hartman & Lim, 2017).

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 In value-in-use, a commodity is produced for direct consumption by an individual to
get their satisfaction level and not for exchanging purpose which can be seen in value-
in-exchange where commodity aims at exchange value rather than the direct
consumption by an individual.
2.4 Strengths and shortcomings of different measurement bases
Strengths of the different measurement bases:
Historical cost method- the assets recorded under the historical cost concept is more
reliable and verifiable as they are recorded in terms of the cost at which they were purchased.
This concept provides easy understandability to the users of accounting information. In
addition, the historical cost concept makes information related to accounting comparable
because the information which is recorded under the historical cost concept is not changed
unless it is very important from the organization's point of view (Easton & Zhang, 2016).
Current replacement cost method- This concept uses the market value for
determining the value of assets. It gives the real picture of accounting information as it
considers the effects of inflation (Ansari & Hosseini, 2017).
Realizable value concept- The advantage of the realizable value is, it records the
value of assets that the seller will get if he sells the asset at present. So it reduces the pressure
on the seller including the time when he actually wants to sell the asset and he also gets the
realizable value for his asset. Accounting Conservatism and Information Asymmetry.
Present value concept- Present value uses the concept of factoring and thus helps in
determining the true present value of assets. This concept of accounting helps to record the
assets as per the nature of cash flow i.e., how cash flows are behaving in the market (South-
Winter & Porter, 2017).

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Shortcomings of the above different measurement bases:
Historical cost concept- Under this concept, the true valuation of the assets is
difficult because the value of the assets is subject to inflation. Inflation can either increase the
asset in value or decrease the value. Besides, depreciation is also one factor that makes the
historical concept controversial. When a fixed rate of depreciation is charged on an asset and
when this value of asset increases by inflation after years, then the same rate of depreciation
cannot provide the true valuation of the assets.
Current replacement cost- The market value of the assets is not always available.
This results in the inappropriate valuation of assets. Closing stock cannot be represented in
market value every time as this value is not available always and cannot be recorded easily.
Realizable value- The realizable value uses the fair value available in the market. It
can affect the value of the asset adversely when the economy is going down. In addition to it,
the fair value concept makes the financial information volatile and temporary because the
selling price keeps on changing as per the market conditions.
Present value- The present value concept is generally used in the matter of
investment. When the investor wants to see the PV of future cash flow, he uses a discounting
rate (Karpov & Shevchenko-Perepolkina, 2017). Thus, the discounting rate has great
significance.
2.5. Arguments to support the measurement bases
 Accountants who use historical cost concept gives an argument that it makes the value
of the financial assets reliable and verifiable as different documents like invoices
support them. There is very little scope of manipulation under historical cost as
evidences like receipts support these (Ahmed et al., 2016).

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 The current cost of replacement is supported by one argument that depreciation is
charged for the replacement cost. This practice gives the true picture of the profit or
loss disclosed by the income statement. If depreciation will be charged on historical
prices of assets, then a very less amount of depreciation will go to income statement
inflating the amount of profit (Bitros & Nadiri, 2017). The earning of an organization
is calculated in terms of current prices. So it becomes important for any organization
to measure the value of assets under the current cost of replacement ( McDonough,
Panaretou & Shakespeare, 2019).
 The PV method tells the present value of future net cash flows. One of the important
arguments supporting the present value concept is Time-value of money. The time
value of money means the money at present will be more valuable than the same
amount in the future. It means an amount today can earn interest on it (Alikar et al.,
2017).
 The argument which favours the net realizable value concept is the conservatism
principle. This principle in accounting says that the expenses and liabilities should be
recorded if there is any chance of their occurrence while the revenue and assets should
be recorded only when there is certainty of income flow from it. Thus, when the
realizable value of any asset goes down below the cost at which it was purchased. In
this case as per the concept of conservatism, the lower cost i.e, the net realizable value
of the asset will be recorded (Odia & Osazevbaru, 2018).
2.6. Relevance of historical cost in financial statement
The historical cost has been subject to many criticisms (Zalaghi & Khazaei, 2016).
The cost method has shown its inability to provide accurate information at the time of
inflation in the market. Since, this cost method does not consider inflation, it shows the
incorrect amount to the accountants which are generally more than the exact amount and

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these earnings of profit when distributed among the shareholders create a negative result on
the company’s assets (Frank, 2019). The method also misstates the results of operation in
current year. This method of accounting takes into account the current year’s income
including accrued income of the previous year which deforms the result of the financial year
of the company and also the previous year. Beside this criticism, the accountants prefer to use
historical cost while preparing the financial statement of a company because of the following
key factors:
 Objectivity-In this cost method of accounting, the original price of the asset is
recorded with the price at which it was purchased. There is no possibility of
calculating the current price of the item or the market price as the cost method does
not require any future changes in the amount (Hadiyanto, Puspitasari & Ghani, 2018).
So, in the financial accounting of the company, the original cost of the financial items
is recorded which makes the report authentic. Hence, this cost method provides
objectivity to the company (Egbunike, Abiahu & Okwuada, 2017).
 Cheap and easy- The valuation under this method is quite cheap and reasonable
being compared to any other methods. Also, due to the existence of the original cost,
the item that cannot be changed further makes it easier for the accountant to record
the data and also makes it easier for an auditor to make proper verification.
 Gives unbiased data- This costing method of accounting provides accurate results
free from any bias, and therefore, one can easily rely on them. The financial statement
can easily be verified with the help of supporting documents like invoices and bank
statements.
Therefore, the historical cost method is given more preference in the management
even though the method has been subject to many criticisms as they are more reliable on this
traditional approach (Byrnes et al., 2018).

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3. Conclusion
Thus, from the above discussion, it can be concluded that the report studies about the
recognition and measurement of assets and their meaning in accounting terms. It also present
the vital components of bases measuring the assets. The study also provides the importance
and shortcomings of different methods of measurement of assets. In addition, it also states
how the value-in-use and value-in-exchange are different to each other. Also, different
arguments regarding historical cost approach are studied to support the report. With reference
to the arguments raised by the different empirical researchers like (McDonald, 1968, &
McKeon, 1971), Revsine (1973) and Chambers (2006) on different bases of measurement of
assets, it is considered that the historical cost approach is more relevant for preparing the
statement of financial position of the entity. So, appropriate measurement basis of assets is
historical cost method and is mainly preferred by the management while preparing the
financial statement of the company to present a fair view of the financial position. The basic
reason behind this approach is the independently verifiable data and the reliability of
management on such a traditional approach.

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4. References
Adusumilli, N., Davis, S., & Fromme, D. (2016). Economic evaluation of using surge valves
in furrow irrigation of row crops in Louisiana: A net present value
approach. Agricultural Water Management, 174, 61-65.
Ahmed, E. R., Aiffin, K. H. B., Alabdullah, T. T. Y., & Zuqebah, A. (2016). Zakat and
Accounting Valuation Model. Journal of Reviews on Global Economics, 5, 16-24.
Alikar, N., Mousavi, S. M., Ghazilla, R. A. R., Tavana, M., & Olugu, E. U. (2017). A bi-
objective multi-period series-parallel inventory-redundancy allocation problem with
time value of money and inflation considerations. Computers & Industrial
Engineering, 104, 51-67.
Ansari, Z., & Hosseini, S. (2017). Review of Accounting Practices Before and During
Inflation.
Bitros, G. G. C., & Nadiri, M. I. (2017). Behavior of business investment in the USA under
variable and proportional rates of replacement. Ishaq, Behavior of Business
Investment in the USA Under Variable and Proportional Rates of Replacement (July
31, 2017).
Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., &
Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297).
Emerald Publishing Limited.
Easton, P., & Zhang, X. J. (2016). Mixing fair-value and historical-cost accounting:
Predictable OCI and mispricing of bank stocks.

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THEORY AND CURRENT ACCOUNTING ISSUES
Egbunike, A., Abiahu, M. F. C., & Okwuada, S. (2017). Financial information disclosure and
the reliability of fair value estimations in published financial statements: evidence
from real estate sector in Nigeria. Egbunike, AP, Abiahu, MFC (2017). Financial
Information Disclosure and the Reliability of Fair Value Estimations in Published
Financial Statements: Evidence from Real Estate Sector in Nigeria. Asian Journal of
Economics, Business and Accounting, 5(1), 1-7.
Frank, E. O. (2019). A Comparative Analysis of Inflation-Adjusted and Historical Cost
Accounting Information: Implications for the Value Relevance of Corporate
Reports. Trends Economics and Management, 13(33), 35-50.
Hadiyanto, A., Puspitasari, E., & Ghani, E. K. (2018). The effect of accounting methods on
financial reporting quality. International Journal of Law and Management, 60(6),
1401-1411.
Karpov, V. A., & Shevchenko-Perepolkina, R. I. (2017). DOES THE INDICATOR OF NET
PRESENT VALUE SHOW THE ACTUAL EFFICIENCY OF PROJECTS?.
tendencies and prospects, 85.
McDonough, R., Panaretou, A., & Shakespeare, C. (2019, May). Fair Value Accounting:
Current Practice and Perspectives for Future Research. In JBFA 2019 Capital
Markets Conference.
Odia, O. J., & Osazevbaru, H. O. (2018). Accounting Conservatism and Information
Asymmetry.
Rahman, M. (2017). Financial Reporting Practices in the Insurance Company in Bangladesh:
An Evaluation of the Implementation of IFRS 4, Insurance Contract. J Account
Mark, 6(218), 2.

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Sakao, T., Wasserbaur, R., & Mathieux, F. (2019). A methodological approach for
manufacturers to enhance value-in-use of service-based offerings considering three
dimensions of sustainability. CIRP annals.
Setyasalma, H., & Muflikhati, I. (2019). Financial Management and Assets Ownership
Toward Subjective Well-being on Entrepreneurial Family. Journal of Consumer
Sciences, 4(1), 25-36.
South-Winter, C. A., & Porter, J. C. (2017). Accounting Basics Part 4: Net Present Value.
Radiology management, 39(2), 11-16.
Taylor, S. A., Hartman, N. S., & Lim, H. H. (2017). Customer Journeys Through the Eyes of
Undergraduate College Students. Journal of Consumer Satisfaction, Dissatisfaction
and Complaining Behavior, 30, 20-20.
Tkachuk, N. V. (2019). Historical Cost and Fair Value: Advantages, Disadvantages,
Application. Journal of History Culture and Art Research, 8(1), 173-182.
Zalaghi, H., & Khazaei, M. (2016). The role of deductive and inductive reasoning in
accounting research and standard setting. Asian Journal of Finance &
Accounting, 8(1), 23-37.

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