Fair Value vs. Historical Cost: An Analysis Based on AASB 13

This report provides an analysis of the fair value measurement method as outlined in Australian Accounting Standards Board (AASB) 13, in comparison to the historical cost method. It explains fair value as the price received from selling an asset or paying off a liability in a transaction, based on market conditions. The report references AASB 16, which allows assets to be valued at either fair value or historical cost, with the possibility of switching methods under specific conditions. Revaluation requirements, especially at the end of each balance sheet date, are discussed, including the handling of depreciation and revaluation increments or decrements. The report also details the historical cost method, where asset value is based on the original purchase price. It concludes by disagreeing with the recommendation to value assets at fair value if the assets are intended for long-term use, as the historical cost method is more appropriate in such cases. Desklib offers a wealth of similar solved assignments and study resources for students.

Answer to Question 3:
INTRODUCTION
The Australian Accounting Standards Board (AASB) has come out with
Accounting Standards (AS) 13 “Fair Value Measurement’ which is in
arrangement with the International Financial Reporting Standards(IFRS) 13
issued by the International Accounting Standard Board recognised
universally. The recognition of concept of fair value in section 334 of
corporation Act ,2001 by the Australian accounting standard. (Anon., n.d.)
ANALYSIS
Fair value can be explained “as the amount which can be received after sell
of an assets or payment of liability for a transaction on a particular date and
time. The measurement is based on market. The purpose of the fair value is
to analyse selling price of an asset that could be realised after selling the
assets on a particular date at an orderly transaction. (Anon., n.d.)
AASB 16 property plant and Equipment explains that all assets are to be
valued at either fair value or at historical cost .The Australian Accounting
Standards Board states that some class of assets can be stated at historical
cost and some at fair value and the entity can also switch from one method
of accounting to another with a proper reason and disclosure to notes of
accounts and the impact of such on the financial statements.Fair value is
used on the basis that the entity is going concern. (Anon., 2016)
Revaluation is required to be done at the end of each balance sheet date
and it must be done with proper regularity so that the carrying value of an
asset does not show material difference from its fair value and if there is
changes again and again over a period of time than revaluation is necessary
for each reporting period otherwise if a company adopt cost method than
every three and five year it is sufficient.

If the assets revalued are depreciable assets any accumulated depreciation
which is left is credited to the assets account prior to revaluation.
Revaluation decrements are shown in the profit and loss as an expense in
the comprehensive income statement report contrary revaluation increment
any increase in revaluation surplus is included in ‘other comprehensive
income’.
Historical cost method also cost method, in this method the price of an
asset is based on the purchase price of an asset ,the original cost at which
the asset is acquired by the entity and this method is generally accepted to
value assets over a period of time .When the entity is acquiring assets for its
long term use with the intention of going concern the company should
follow historical cost method in recording assets to its books of accounts
rather than Fair value method as this method as this method is not possible
for those entity who is acquiring the assets for long term use as in this
method every year the company is to revalue the asset value to arrive at
the selling price which could be received if the asset is sold in the market.
(Anon., n.d.)
CONCLUSION
Busy Bee Limited Company CEO, John Cooper recommendation to value the
asset at fair value method which can increase the value of its assets each
year rather than cost method is not appropriate assuming that the company
has purchased the assets for its long term use in the business.
Bibliography
Anon., 2016. Assets and Revaluation. In: Company Accounting. Australia: Mc Graw Hill Education.
Anon., n.d. Financial Reporting -Fair value. [Online]
Available at: http://australianvaluations.com.au/asset-services/financial-reporting-fair-value-accounting/
[Accessed 31 july 2018].
Anon., n.d. Historical cost. [Online]
Available at: https://www.investopedia.com/terms/h/historical-cost.asp
[Accessed 31 july 2018].