ACF 212- IAS29 (Financial reporting in hyperinflationary economies)

Conceptual framework, measurement and capital maintenance.

What is measurement?

Measurement is the process of determining the monetery amount at which an element is to be shown in the financial statement.

Explain what is meant by Historical Cost

• Assets are measured at the amount paid to acquire them.

• Liabilities are calculated based on money received when taking on a responsibility or the money expected to be paid for that responsibility .

What is meant by Current Value?

Assets and liabilities are based using up to date information that excludes any changes or conditions that happened after the measurement date.

What is Fair Value?

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

What is Value in Use?

The present value of the net cashflows that a company expects to receive, from using an asset and eventually selling it.

What is Current Cost?

The amount of money that would be required o buy or sell a similar asset or liability at the current date, also known as replacement cost.

What is NRV?

NRV is the estimated selling price less the estimated cost of completion and the estimated cost necessary to make the sale.

What are the advantages of NRV?

• Any loss expected on the sale of items at less than the cost is recorded

• It’s more meaningful and more understood

• Avoids the need to estimate depreciation

What are the disadvantages of NRV?

• It;s not relevant

• Violates going concern

• Less faithful and verifiable

• Subjective measure.

When should a firm replace an asset?

If the replacement cost < recoverable amount

When should a firm NOT replace an asset?

If replacement cost > recoverable amount

What is the Deprival Value?

An asset cannot be worth more to a firm than the decline in the value of the firm that would happen if it were to not have the asset

What are the advantages of Historical Cost Accounting?

• Simple accounting system that we can understand

• Well established

• Has the important characteristic of objectivity

What are the disadvantages of Historical Cost Accounting?

• Profits are overstated

• Depreciation charges are inadequate

• Gains/losses are not shown

• NCA values are non realistic

What does present value in use involve?

It involves discounting the cashflows derived from an asset.

What are the advantages of Present Value in Use?

You only need three pieces of information:

• The amount of the cashflows

• Timing of the cashflows

• The discount rate

What are the disadvantages of Present Value in Use?

There are only 3 pieces of information you don’t know:

• The amount of the cashflows

• The timing of the cashflows

• the discount rate

Explain what is realised holding gain

Holding gain is associated with those assets which have been consumed in the accounting period.

How is realised holding gain calculated?

Current value of assets at the date of consumption less the historical cost

Explain what is unrealised holding gain

Increase in value of assets that the company still possesses at the end of an accounting period.

How is unrealised holding gain calculated?

Current value of assets at the end of the year less the historical cost

What are the advantages of Replacement Costs?

• Monetary unit of measurement

• Identifies and separates holding gains from operating income

• Introduces realistic current values of assets to the SOFP

What are the disadvantages of Replacement Costs?

• It’s a subjective measure

• Assumes replacement of asset

What is the economic definition of income in terms of wealth?

John Hicks (1946) defines it as the maximum amount a man can consume during a week and still expect to be as well off at the end of the week as he was at the beginning of the week.

Explain Financial Capital Maintenance

A profit is earned if the financial or money amount of an entity’s net assets at the end of an accounting period is > the financial or money amount of an entity’s net assets at the beginning of that period.

Explain the Physical Concept of Capital

A profit is earned only if the physical operating capability of the entity at the end of an accounting period is > its physical operating capability at the start of the period.