AFAR_TMA2_Final.docx - TMA 2 Advanced Financial Accounting and Reporting – Answer Question 1 The argument between fair value measurement and

AFAR_TMA2_Final.docx - TMA 2 Advanced Financial Accounting...

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TMA 2: Advanced Financial Accounting and Reporting – Answer: Question 1 The argument between fair value measurement and historical cost accounting are depending on reliability versus relevance. Generally, fair values are deemed as relevant but no reliable while historical cost accounting is deemed as reliable but not relevant. Fair value can be defined as the amount that would be accepted to sell an asset or paid to transfer a liability in an orderly transaction market participants at the measurement date. We can said fair value may be more relevant than historical cost in corporate reporting because it is based on current market values rather than a value that is in past or out of date. Fair values for an entity’s assets that will be more close approximation to the value of the entity as a whole and more beneficial to a decision maker or an investor. If there is more standardization in fair valuing . In other words, we can said it is more consistency between companies. In accordance with IFRS 13 Fair value measurements, if the valuation is no being immediately, thus fair value measurement will have the beneficial of being both relevant and reliable. Historical cost accounting is more to be matched cost and revenue. The main objective has been to match the cost of the asset with the revenue it earns over its useful life. It has few disadvantages as stated below: (a) If the amount of historical cost differs from its fair value on first recognition, the matching process in future periods becomes willful. (b) Fixed asset values are unrealistic, especially those of property. (c) The holding gain on inventory will be mixed up with operating gain or losses. Holding gain or losses should be isolated from operating gain or losses to determine the real and fair operating performance. (d) Comparison over time are unrealistic, because they do not take account of inflation. (e) The cost of an asset is incurred before recognized and are not capitalized. Especially on true of development expenditure, and means that the historical cost does not represent the fair value of the consideration given to establish the asset.
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However, historical cost has few advantages over fair values, it is more regarding to reliability which: (a) It is quick and easy to ascertain. (b) It is less open to manipulation. (c) Matching (cost and revenue). (d) It is confirmed in real transaction amounts, objectively verifiable. Lastly, the historical cost accounting will continue to be used until the fair value measurement is more equalize and objectively.
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Question 2 a. Impairment loss - It can be described as the amount determined by which the asset’s carrying amount is greater than its recoverable amount. The accounting standard requires a business to make provision for the impairment loss if the asset is impaired. For example, the carrying amount of the machinery is RM 60,000 and its recoverable amount is RM 36,000. The impairment loss of the machinery is RM 24,000 (RM 60,000 – RM 36,000).
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  • Winter '16
  • Winnie Wong
  • Depreciation, Generally Accepted Accounting Principles

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