5-1Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&()*A*C)A" ACC+,*#)*G #HE+-.Craig %&&ganSlides written by Craig DeeganCHA!#E- 5M&asur&$&nt issu&s/ accounting 0or th& &00&cts o0 changing pric&s and changing $ar1&t conditions5-2Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&"&arning o23&cti4&s551Understand what measurement means, why it is a potentially controversial issue, and some of the factors that accounting standard-setters might consider when prescribing a particular measurement approach in favour of another. 552e aware of the various measurement approaches currently, and potentially, in use. 556e aware of some particular limitations of historical cost accounting in terms of its ability to cope with various issues associated with changing prices and changing mar!et conditions. 554e aware of a number of alternative methods of asset valuation that have been developed to address problems associated with changing prices and mar!et conditions, including fair value accounting. 5-6Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&"&arning o23&cti4&s (continu&d555e able to identify some of the strengths and wea!nesses of the various alternative measurement approaches. 557Understand that the calculation of income under a particular method of accounting will depend on the perspective of capital maintenance that has been adopted. 558e aware of the increasing use of fair value measurement in accounting standards. 559e aware of evidence about the demand for, and professional support of, alternative measurement approaches. 5-4Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&M&asur&$&nt"#hat is it$"%ccording to paragraph &.'& of the IASB Conceptual Framework for Financial Reporting(Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. his in!ol!es the selection of the particular basis of measurement."M&asur&$&nt is obviously a very fundamental issue in financial accounting. )easurement allows us to attribute numbers to the items that appear in financial reports5-5Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&!roc&ss o0 $andating a particular $&asur&$&nt approach could 2& contro4&rsial"#hen standard-setters re*uire a particular method of measurement in preference to others, this can be controversial"it can have profound effects upon financial reports, and therefore also on agreements, or contracts, that utilise numbers from the financial statements5-7Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&Alt&rnati4& 2as&s o0 $&asur&$&nt"+here are various bases of measurement that could be used, including(, historical cost , current costs, realisable value, present value, deprival value5-8Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&Choosing 2&tw&&n alt&rnati4& $&asur&$&nt 2as&s" Determining how an asset or liability should be measured should ideally be lin!ed to the perceived ob-ectives of general purpose financial reporting" %ccording to paragraph ./ of the IASB Conceptual Framework for Financial Reporting, the ob-ective of general purpose financial reporting is(to pro!ide financial information about the reporting entity that is useful to e"isting and potential in!estors# lenders and other creditors in making decisions about pro!iding resources to the entity. hose decisions in!ol!e buying# selling or holding e$uity and debt instruments# and pro!iding or settling loans and other forms of credit." +he above perspective is often referred to as a d&cision us&0uln&ss: p&rsp&cti4&5-9Copyright 2014 McGraw-Hill Education (Australia !ty "td!!#s to acco$pany %&&gan' Financial Accounting Theory 4&%&cision us&0uln&ss 4&rsus st&wardship 0unctions" ;%&cision us&0uln&ss and st&wardship are two terms that are often used in relation to the role of financial information " +he decision usefulness criterion is considered to be satisfied if particular information is useful 0decision-useful1 for ma!ing particular decisions, such as decisions about the allocation of scarce resources " Decision usefulness appears to be the focus of financial reporting currently embraced by the 2%S and 3%S " %n alternative focus other than decision usefulness would be stewardship5-S establishes a fair value hierarchy that categorises into three levels 0see paragraphs A=,e*uirements to mar!-to-mar!et financial assets held by ban!s may lead to a rapid erosion in the capital and reserves shown in the ban!s statements of financial position " +his will reduce their lending limits and will both reduce ban! lending 0thus reducing demand in financial mar!ets, putting further downward pressure on the assets prices in these mar!ets1 and possibly re*uire the ban!s to sell some of the financial assets they hold to release li*uidity" +his will put further downward pressure on the asset prices, leading to a downward price spiral as these reduced prices further reduce the reported net assets of the ban!scontinued5-5