Fair Value Versus Historical Cost Reporting †MyAssignmenthelp.com

Question: Discuss about the Fair Value Versus Historical Cost Reporting. Answer: Introduction: Financial Statements may be defined as comparative summary of the financial performance of the company which is depicted by the statement of profit and loss account, balance sheet of the company and cash flow statement. The methods which are used for the measuring the elements of financial statements of a company are discussed below: Historical Cost method: In this method all the assets of the company are measured on the basis of fair value or the amount of cash or cash equivalents which was used at the time of acquisition of the asset (Liang Riedl, 2013). Similarly, liabilities are measured at cash or cash equivalent which has to be incurred to satisfy the amount of liabilities. Current Cost Method: In this case the assets are valued the amount of cash or cash equivalent that needed to be paid in order to acquire the same or equivalent asset in current situation. Realisable Value: In this case the assets or liabilities are measured at the cash or cash equivalents which the company will receive or bear after selling the asset or satisfying the liability respectively. Present Value: This method measures the assets and liabilities at present discounted values of net cash inflows which the company expects from such an asset or liability. Fair value method refers to the estimated price at which assets or liabilities are transferred between parties who have adequate knowledge about the market. As per the definition fair value of an asset or liability can differ from market value as it is estimated on the basis of the parties which are involved in the transactions (Hodder, Hopkins Schipper, 2014). Fair value measurement for a non-financial asset is measured by the economic benefits which the asset can generate with its best use and application. Fair Value Measurement is done with the help of following the standard issued which is AASB 13. Reference Hodder, L., Hopkins, P., Schipper, K. (2014). Fair value measurement in financial reporting.Foundations and Trends in Accounting,8(3-4), 143-270. Liang, L., Riedl, E. J. (2013). The effect of fair value versus historical cost reporting model on analyst forecast accuracy.The Accounting Review,89(3), 1151-1177.