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1. Chapter 4: Measurement Contemporary issue 4.1 The standard setters search for the ‘best’ measurement basis Questions What is meant by the term market context? Why is context so important in accounting measurement? Is adoption of a single measurement base approach likely to work in practice? Justify your response. Why do you think standard setters have considered a single measurement base approach? In your response, consider the fundamental problems that such an approach could help resolve and how such an approach would fit with the qualitative characteristics of accounting information prescribed under the Conceptual Framework. 1. Measurement methods used in the preparation of the financial statements should be selected with the market context in mind. Values determined without market context in mind may not be reflective of market conditions or meet user’s needs. In other words, to provide the most accurate and decision useful accounting information, the most appropriate measurement approach is likely to be dependent on specific circumstances such as the nature of the market for the asset at the time. If the market is to play a role in valuation, we want to ensure that the resulting value reflects the fundamental value of the asset and that the operation of market forces does not lead to over or under valuation of the asset. What is important to users may also change from time to time. 2. Responses to this essay style question will vary from student to student. Students should be encouraged to form their own views and provide in depth discussion supported by references and examples. Some key points of relevance include: Arguments for adoption of a single measurement base approach are based on an idealised view of markets being complete and in perfectly competitive equilibrium. In reality, markets are imperfect and incomplete and ideal unique market prices are not available for all assets and liabilities. This has led to the use of the fair value hierarchy. The lower levels of the hierarchy requiring estimation of what the market price might be if one existed. The information produced is therefore not ideal. A single preselected measurement method may not best reflect market conditions or meet user needs at that time. Assumes a particular measure will always be the most relevant and will always be able to be reliably measured. Some argue that there is no single ideal measure and that the focus should be on identifying the information that is most likely to meet the needs of user’s decision models. Application of IAS 39 during the recent GFC as an illustration of the practical importance of market imperfection and incompleteness. 3. Responses to this essay style question will vary from student to student. Students should be encouraged to form their own views and provide in depth discussion supported by references and examples. Some key points of relevance include: In perfect market conditions, there is a unique market price based on full information for every asset and liability. This provides a relevant, reliable and objective measure of an assets fair value when such observable market prices are available. This argument seems to be a key driver behind the push for fair value as the single ideal measurement base approach. Mixing different measurement bases is believed to create mismatch problems. This problem refers to the fact that different items in the same set of accounts are measured on a different basis, making aggregation (totals) misleading. A single measurement base approach would promote consistency within accounts, avoiding this mismatch, and allowing more meaningful aggregation. This approach would also improve comparability of accounts between different entities. Fair value favoured approach due to its relevance – measures market expectations of future cash flows to be derived by the entity and objectivity – reflecting the markets view rather than views of management associated with the entity. Contemporary issue 4.2 The subprime lending crisis and reliable reporting Questions In practice, which measurement base, historical cost or fair value, would provide the most relevant and reliable accounting information? Draw on the facts presented in the situation above, as well as your knowledge of the global financial crisis, to justify your response. Discuss the role of market stability and the financial business cycle in determining the relevance and reliability of the accounting information produced. 1. Responses may vary from student to student as there are many paths that discussion could take. Some key discussion points follow. Fair value or historical cost on their own, are not likely to achieve both characteristics. Inherent trade-off between relevance and reliability – the information which is most relevant is often less reliable. The information which is most reliable tends to be that which is less relevant. There has been a move towards fair value and away from historical cost on the basis of relevance. It is argued that reporting assets and liabilities at their fair values provides more relevant information for investment decisions than historical cost. Reliability is difficult to achieve under fair value when we are dealing with hypothetical transactions that are not objectively measureable. This is the situation we face when observable market prices are not available. In other words, when an active and liquid market does not exist for the asset. Some argue that once reliability becomes compromised, the information produced also becomes less relevant. Integration of the two measurement bases suggested. For example, historical cost financial reports could be enhanced by providing fair value information through footnote disclosures. A balance to achieve both greater relevance and reliability. 2. Market stability and the nature of the financial business cycle play a large role in the determination of market prices, and therefore impact upon the relevance and reliability of accounting information produced using fair value. Falling prices in an unstable market may worsen market stability. Companies tend to react to falling prices by rushing out to sell their assets before their competitors, causing a further downward spiral in prices. In a market bubble, values may be overstated, and values will most likely not be realisable if many market participants decide to sell those assets at the same time. The bubble bursts and prices fall again. Financial statements measuring assets and liabilities at fair value in unstable or illiquid markets are not likely to be relevant or reliable for the purpose of decision usefulness. Students may refer to the subprime lending crisis or other examples to illustrate the role of market stability and the financial business cycle. Contemporary issue 4.3 Serving the public interest Questions Explain the impact of globalisation and conflicting commercial and public interests on measurement choices made by accountants. Why is acting in the public interest so important when it comes to measurement? Do you agree or disagree with the statement that public interest is a quaint and unnecessarily restrictive notion of the past? 1. It is becoming increasingly common for there to be little or no thought as to the role of the accounting profession in society and the interests of the public. Accountants face a huge conflict of interest where their loyalties are torn between the commercial interests of their employer and the public interest. With globalisation come opportunities, greater competition, and therefore a greater need to report desirable results. The question is does pursuit of these opportunities come at the expense of acting in the public interest. One of the key factors driving measurement choice is management’s motivations and objectives. In the article it is argued that accountants are becoming more commercially minded and public interest is now an unnecessarily restrictive notion of the past. They are focused on fulfilling the entities commercial interests and this is what influences their choices with regard to accounting measurement. For example, if a particular profit target has been set, in the interests of self-preservation and a desire to impress management will lead to accountants choosing the measurement method which will result in the largest reported profit. Whether use of this measurement method results in figures which provide a true reflection of reality or how these reported figures would impact decision making of other stakeholders and the general public would generally not be given a second thought. It would be interesting to get students views on this reality check and see if they can come up with some more examples. 2. Acting in the public interest is so important when it comes to measurement because our choice of measurement method impacts the picture of reality we paint for users of the financial statements. If this reality is not a true reflection of the entity, users will make inappropriate decisions that could be detrimental to their interests. Responses to the latter part of the question may vary between students. The important thing here is to encourage students to take a stance and justify their position by making reference to relevant theories and real world examples such as General Motors. Review questions Define measurement in the context of accounting and financial reporting. The Conceptual Framework defines measurement as: 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. Measurement in an accounting context therefore refers to the way the figures on the financial statements are determined. It is described as an act or process which may involve calculations, making estimates and comparisons, and apportioning or distributing amounts. Why is measurement so important in accounting? Measurement is crucial to be able to provide decision-useful accounting information and to accurately appraise the performance of management. These are the primary purposes for which financial statements are prepared. The way items are measured in accounting impacts on the quality of accounting information produced. In order to fulfil the decision-usefulness objective, the financial statements produced must contain good quality accounting information which will assist decision makers in making the right (appropriate) decisions. Poor quality accounting information, resulting from the use of inappropriate measurement methods, may mislead users and this could potentially cause them to make wrong (inappropriate) decisions. If accounting information leads to wrong or inappropriate decisions it is not useful. The financial statements produced must also contain good quality accounting information in order to accurately determine how well management has performed its role in managing the resources of the entity. Poor quality accounting information, resulting from the use of inappropriate measurement methods, will give the wrong impression as to how well management has performed its role. Discuss the current approach to measurement adopted by standard setters. Why have they adopted such an approach? What are the issues and problems associated with this approach? Under the international standards we adopt what we call a mixed measurement model. Under this approach a number of different measurement bases are employed in the preparation of the financial statements. Historical cost, current cost, realisable value and present value are all employed to different degrees and in varying combinations during the preparation of the financial statements. The main reason for adopting such an approach is the need for flexibility. This model allows for use of a number of different measurement bases. This is necessary due to the differences in the substance or nature of transactions between entities and also due to the differing circumstances that entities can find themselves in. Issues and problems associated with this approach include: Variations in accounting practice – entities may choose to account for the same or similar items in different ways using different measurement methods. How they measure and account for an item may be appropriate for the individual entity but could reduce comparability across entities. Potential for different financial results being reported when different measurement methods are allowed and used. Discretion means opportunity for management to make opportunistic accounting choices, creating a biased picture of reality and perhaps even misleading users. In summary, the approach is necessary but subjective in nature. This highlights the importance of professional judgement and ethics in accounting. Explain the arguments for and against using historical cost as a measurement base. Key arguments for historical cost include: Most objective measurement approach - amounts are determined based on actual transactions. Clear audit trail – amounts can usually be proven by documentation. Key arguments against historical cost include: Amounts determined may not be relevant to current decision making if there is a long time span since the transaction occurred. Historical cost does not take into account changes in the value of money over time. In other words, it ignores price inflation. The amount paid for an item or received for an item may not necessarily be indicative of its value. Judgement involved in determining depreciation rates can create inconsistencies and opportunity for manipulation. Inability to determine the cost of some items. Items may be donated with no actual cost to the entity. Items may be internally generated rather than purchased. Explain the difference between current and replacement costs. Current costs and replacement costs are both essentially the costs that would be incurred if we were to replace the items now. However, these terms represent two different methods of measuring the cost of replacing the items. Current cost requires the item be valued and recorded at the amount that would be paid at the current time to provide the future economic benefits expected to be derived from the current item. Replacement cost requires the item to be valued and recorded at the amount that would be paid at the current time to purchase an identical item. Current cost is a broader concept in that it represents the cost of obtaining the same expected future economic benefits, but these benefits may be assumed to be achieved in different ways, not necessarily through purchase of an identical item. Replacement cost is much more specific in that it represents the cost of purchasing another item identical to the current one. Explain the arguments for and against using fair value as a measurement base. Key arguments for fair value include: Most relevant measurement approach for current decision making. The amount that will be received for an item or that will need to be paid for an item is decision useful information. Objective if determined by reference to the market price for an item. The market price is set by forces outside the entity. It is not biased by judgement and cannot be manipulated or influenced by management. Key arguments against fair value include: Subjective where a market price is unavailable. Some items are not regularly traded in an active market and an estimate of the items fair value must be made. The focus on exit values is not logical and contradicts the going concern assumption. We are measuring as though we are going to sell off all the assets, which is not usually the case. Market prices can be volatile and therefore sometimes may not be indicative of the true value of an item. Short term fluctuations in fair value may be irrelevant and cause confusion from a user perspective. What role does estimation and judgement play in accounting measurement? Discuss with particular reference to present value. The key issue to note here is that certain measurement methods are more subjective than others. As a consequence, the relevance, usefulness and reliability of the accounting information produced using these more subjective measurement methods becomes questionable. Present value is a good example because managements estimations of cash flows expected to be received in the future can be quite subjective. The estimations are made at management’s discretion and their internal biases may come into play. Assertions and assumptions are made by management in forming such estimates, and for this reason, the values determined cannot be assumed to be objective. Present value is also subjective in the sense that there are also a wide range of discount rates to choose from. There is often much variation between entities in the discount rates applied. Identify factors that may influence the choice of measurement approach. Discuss how the measurement approach adopted impacts on the quality of accounting information produced. Key influences include: Potential users of the financial statements - user needs must be understood in order to choose the measurement approach which will provide the most decision useful information. Practical considerations – a particular cost or value may be too difficult or even impossible to determine. Choice of measurement approach also needs to be cost effective. The cost of obtaining or calculating the cost or value must be considered. Management’s motivations and objectives – motivations, underlying objectives and time horizon can all influence management behaviour in terms of choice of measurement approach. For example, if management have a short term focus, are on a shorter term employment contract, or have bonuses tied to profits, they will most likely choose the measurement approach which produces the best results in terms of higher profits. The measurement approach adopted impacts on the quality of accounting information because it has a direct impact on the relevance, faithful representation, understandability, comparability and verifiability of the information produced. Accounting information which possesses these characteristics is more decision useful, therefore fulfilling the decision usefulness objective, the purpose for which financial statements are prepared. A detailed analysis of how each of the individual measurement approaches discussed in the text impacts on the quality of accounting information can be found on pages 104-107. Discuss why accounting measurement has become such a controversial issue in recent times. In recent years there has been a significant paradigm shift in relation to accounting measurement. There has been a distinct move away from historical cost toward fair value and fair value is by far the most controversial measurement approach. Key reasons for such controversy include: Subjective nature of estimates involved in determining fair value where no active market exists for an item Role of management assumptions and judgement make accounting information produced more prone to manipulation Variability in valuation techniques used between entities Volatility in earnings reported as a consequence of changes in fair value from period to period Potentially misleading nature of the earnings figure produced under fair value Some points regarding the controversial nature of accounting measurement in a more general sense follow: Potential for inappropriate choices in measurement approach Variability in measurement approaches adopted for the same or similar assets Political influences on measurement decisions Subjectivity and discretion involved in determination of some values Impact of measurement on achievement of other organisational objectives Why is accounting measurement described as political? Key points are as follows: Numerous different interest groups are involved in accounting regulation through the standard setting process. The process incorporates lobbying by the different interest groups with regard to measurement issues embedded within the standards. Interest groups are often biased or influenced by self-serving objectives. Wealth transfers often provide the basis or incentive for decisions made in relation to accounting measurement. Most parties and interest groups within our economy would act to maximise their own wealth, not necessarily with the best interests of stakeholders or the decision usefulness of information produced in mind. Validity and acceptance of use of fair value as a measurement approach in times of economic downturn. Impacts on wealth within the economy need to be considered in the sense that certain types of entities may be disadvantaged by the decision to adopt fair value. The nature of an entities asset base and the transactions they undertake may mean they are more vulnerable to economic downturn and the operation of the capital market, causing them to report greater losses. Use of fair value has also revealed the truth in some circumstances, highlighting losses that were masked by different accounting treatment adopted previously. This has brought financial reporting into the public eye and made it a public concern. Reliability of accounting information produced using fair value as the measurement base. Where no active market exists for an item, determination of fair value becomes quite subjective. With discretion and judgement comes opportunity for potential manipulation of values. This issue has been highlighted in recent corporate collapses where the complex interactions of individuals within society and consideration of what motivates them to make particular accounting choices and decisions has come under great public scrutiny. Accounting has been the scapegoat for many circumstances which have had far reaching impacts on the public. Views put forward in the literature have been inconsistent in that they are largely dependent on what issues are currently prevalent in the political arena. Players seem to change their view and opinion of the appropriateness of the various measurement approaches depending upon current political objectives and what needs to be achieved. In this sense, we can view accounting measurement as a political tool. Difficult nature of managing the political relationships that arise due to stakeholders conflicting interests. For example, the conflict that arose between regulators and banks in the context of the recent GFC. Inadequate operation of financial markets, resulting in prices which are not necessarily indicative of market value. For example, during the GFC agency ratings were a key information source and therefore played a major role in the markets determination of price. The fact that the ratings agencies were paid by the entities means ratings given were not necessarily reflective of true risk and the whole market mechanism fell apart. In situations such as this, we even begin to question the accuracy of market prices and the whole market mechanism which we have come to rely on comes under scrutiny. In your own words, explain what different stakeholders want from financial statements. Consider whether the measurement approach adopted impacts on the extent to which accountants are able to fulfil stakeholder needs. Different stakeholders all want something different from the financial statements. These differing needs must be considered and balanced out in the preparation of the financial statements. Existing and potential investors are concerned about two key things. The risk they are exposing themselves to and the return they can expect from their investment in the entity. They want accounting information that will assist them in deciding whether to buy, hold, or sell their shares in the entity. They also want accounting information which will help them to assess the entities ability to pay dividends. In other words, they are interested in the potential value and future viability of the entity, with a particular interest in current values and the entities ability to generate profits. Lenders and other creditors want accounting information that will enable them to determine whether amounts owing to them will be paid when due. They are therefore most interested in the entities net position, the amount of liabilities it has compared to the assets it holds. They want information that reflects the current value of assets and liabilities, giving an indication of the future viability of the entity. There is a need for adoption of different measurement approaches in order to satisfy the needs of key stakeholders. In fact, even an individual stakeholder demonstrates a need for accounting information based on more than one measurement approach. It is evident that an appropriate measurement approach needs to be considered in context and is very much dependent upon the entity, its objectives and current circumstances. This reinforces the need for a mixed measurement model in order to satisfy stakeholder needs. What is our primary objective when accounting for heritage assets? Heritage assets are tangible items associated with our cultural or natural environment that communities desire to preserve. One can argue that the primary objective for which the asset is held should drive how it is measured. Therefore, being clear on our primary objective is important. If our objective is to maintain and preserve these assets then it makes sense that we should not be reporting $ figures but rather providing a qualitative account of whether our objectives are being met with regard to maintenance and preservation of these items for the purpose of providing enjoyment and benefit to the wider community. If our primary objective was to generate revenue or profits from these assets then quantifying them in $ terms would make sense. Get students to argue this out amongst themselves, making sure that they get the link between objective, measurement and reporting. Application questions 4.13 Obtain the annual reports of three companies in the same industry and consider the items included in property, plant and equipment. Answer the following questions. (a) What range of measures is used to determine amounts for these items in the reports of the individual companies? Do you think it is valid to add the items, given the measures used? How would you interpret the total amount for property, plant and equipment in the financial statements? (b) Compare the measures used by the different companies for similar items. Are there any inconsistencies in how similar items are measured by the different companies? (a) The range of measures used will vary depending upon the annual reports selected by the students. Students should however be able to describe succinctly the approach/approaches taken in measuring the company’s property, plant and equipment. If there is a wide range of measures used it may also be useful for students to think about and comment on why this is necessary. Adding items determined using different measurement approaches gives rise to the additivity problem. It is not really logical to derive meaning from the total figure when a range of different measures are used. Even if the same measurement approach was used to determine the amounts for all property, plant and equipment items, the fact that the amounts were most likely determined at different points in time, makes the total less meaningful. (b) Responses will obviously vary depending upon the combination of reports selected by students. It is important to get students to tease out why any identified inconsistencies have occurred and develop their thoughts as to whether such inconsistency is justified. 4.14 Examine the requirements for measuring financial instruments in AASB 139/IAS 39 Financial Instruments: Recognition and Measurement. What measures are used to determine amounts for these items? Do you think it is necessary to use different measurement bases for different types of financial instruments? Justify your response. What measures are used to determine amounts for these items? Students are required to examine AASB 139/IAS 39 and describe the measures required to be used for the different categories of financial instruments. Do you think it is necessary to use different measurement bases for different types of financial instruments? Encourage students to form their own view by exploring the nature of each of the different categories of financial instruments and thinking about how they differ from one and other. It is also important that students analyse the appropriateness of the measurement approach required for each category and determine whether there is justification for different measurement bases. The nature and characteristics of the different categories of financial instruments should come into the discussion here. 4.15 Identify an example of a heritage asset. Analyse whether this item should be recognised on the financial statements? Refer to the Conceptual Framework to support your analysis. Is the item something that can be valued by quantifying it in monetary terms? If so, how would this value be determined? Identify the specific stakeholders that would be interested in financial information about this heritage item. What other information about the item do you think stakeholders might be interested in? Students could come up with many examples here which may include: national parks historical buildings indigenous paintings and artefacts marine parks museum collections. When analysing whether the item should be recognised on the financial statements students should refer back to the definitions and recognition criteria for assets and liabilities in the conceptual framework. The question of whether the items can be valued in monetary terms should generate a lot of discussion amongst students. Some will argue that there is a logical way to quantify particular items while for others there may not be any logical argument or solution. There is no straight answer to this question but the objective here is to highlight exactly that point. Stakeholders would likely include the general public, schools, and special interest groups such as environmentalists and historians. Note that the most prominent stakeholder is not likely to be shareholders. Stakeholders are more likely to be interested in qualitative non-financial information about the asset rather than financial information. 4.16 Examine the requirements for measuring assets at fair value in AASB 141/IAS 41 Agriculture. (a) How can fair value be determined under this standard? (b) What impact would the differences in the methods allowed to determine fair value have on the financial reports? In particular, consider the potential impact on reported profits. (a) Students are required to refer to AASB 141/IAS 41 and describe how fair value may be determined under this standard. (b) Students should be encouraged to explore this issue in depth, thinking about the specific impacts of each method on the financial report and then exploring the impact on reported profits in further depth. Some methods have a greater impact on reported profits than others and students should be encouraged to take their discussion further by thinking about the consequences of or motivations behind using a particular method to determine fair value. 4.17 Do you think the requirement for an active market should be mandatory when measuring at fair value? What problems can occur when determining fair value of an item in the absence of an active and liquid market? Provide examples to justify your response. Responses to this question will vary from student to student. Students may go either way but a good response will acknowledge arguments for and against. Some key points of relevance are outlined below. Many argue that measurement at fair value can only be reliable and accurate when determined using market prices derived from an active and liquid market. Reference to market prices is certainly the most objective way of determining fair value but do the prices accurately reflect the fundamental value of the asset being measured? In other words, can we be sure the market mechanism is operating effectively so as to not over/under price items. Market price may not be reflective of the fair value of an item which makes the information produced less relevant and useful to users. It is often argued that in some circumstances a calculation using a specific internal model is necessary to accurately estimate fair value. It is generally argued that determination of fair value in the absence of an active and liquid market is quite subjective. Market prices are determined by the interaction of forces outside the entity while other approaches used to estimate fair value in the absence of an active and liquid market require management to make various assertions and assumptions. Considerable judgment and discretion on the part of management is involved when an active market does not exist for the item. Accounting information produced may be misleading if management makes inappropriate assumptions or makes other decisions, which when left to their judgement or discretion, are made inappropriately. Estimations of fair value can become quite complex and confusing from a user perspective. This then impacts on the understandability of information produced. Students should draw on examples that they are familiar with to justify their response. 4.18 The following information is provided about a particular machine used by a company in its operations. The machine is technological in nature and new models are coming out all the time. The machine originally cost $80 000 and it would cost $140 000 now to replace this machine. The company expects to receive $112 000 (discounted to present value) in cash inflows from using this machine over the next 5 years. If we were to sell it now, the machine would bring in $60 000. Consider the decision usefulness of accounting information produced when using each of the above figures as a measure of the value of the machine. In particular, consider usefulness from the perspective of the following stakeholders: (a) Shareholders (b) Creditors (c) Employees Original cost $80 000 – This represents the amount paid for the machine when it was originally purchased. This amount is not necessarily very decision useful from a user perspective, especially if the machine was purchased a long time ago. Users are not really interested in how much was paid for an item in the past. Cost $140 000 to replace the machine now – This represents the current amount we would have to pay to purchase a machine identical to the one being replaced. This amount is a good indicator of the current value of the machine and is decision useful from a user perspective. However, if the machine is technological in nature and new models are coming out all the time, this method of measuring the value of the machine does not make sense. The current machine would most likely not be replaced with an identical one. It would be replaced with a better and more efficient model. In which case, the current cost of an identical machine is irrelevant. The cost of reaping the same benefits using a new and better machine may be quite different to the cost indicated above. Present value $112 000 – This amount represents the benefits expected to be derived from the machine over the next 5 years in current dollars. This is a good indicator of the value of the machine and is decision useful from a user perspective because it is forward looking and provides information about current value and future viability. Sell now $60 000 – This amount represents the current market value for this particular item. In other words, the amount we would receive if we were to sell it now. This is a reasonably good indicator of the value of the machine but could also be misleading. For example, if the machine is still very efficient and productive, what it would sell for in the market a few years later is not necessarily going to reflective of its value. In other words, we can argue that use of this approach would lead to the machine being undervalued. The other side of the argument is that this particular model may not even sell, given the technological nature of the machine and the fact that there are new and better models on the market. One could also argue that use of this approach would lead to the machine being overvalued. Decision usefulness of the information produced using this approach to value the machine is therefore questionable. Shareholders are interested in the current value of their investment and the ability of the entity to pay dividends in the future. Therefore present value as an indicator of the value of the machine would be most useful from their perspective. Creditors are interested in the entities ability to pay its debts when they become due. They are interested in the entities current value and in particular it’s net position. The original cost of the machine would therefore be irrelevant from their perspective. Depending upon the particular circumstances of the machine, replacement cost, present value or even the sale value would provide information which is useful from a creditor perspective. The approach that will provide the most decision useful information depends on management’s intent with regard to the asset and how long it has been held. Employees are interested primarily in the future viability of the entity, particularly their ability to pay their wages in the future. Therefore present value as an indicator of the value of the machine would be most useful from their perspective. 4.19 Obtain the annual reports of two companies in different industries. Assess the decision usefulness of the accounting information contained within these reports from the perspective of the following stakeholders. In your response include an explanation of how the measurement approaches adopted have impacted on the usefulness of the information. (a) Shareholders (b) Managers (c) Government Student responses to this question will vary according to the entities selected. Discussion points raised will depend on the measurement approaches adopted by the entity and the nature of who the key stakeholders are. The most important thing is that students are able to develop clear links and adequately explain these linkages between the measurement approaches adopted and the decision usefulness of accounting information. Students should be able to identify and analyse such linkages in some depth. It is also important for students to note that the extent of the decision usefulness of accounting information is very much dependent upon who the key stakeholders are. For example, shareholders are most interested in information which reflects the current value of the entity, its future viability and ability to generate profits, while managers are more interested in information about the internal operation of the entity and its efficiency that will help them to make important decisions. Government is most interested in information which tells them about whether the entity has complied with particular rules and regulations. Information about the general financial wellbeing of the entity may also be useful from a government perspective, depending upon the relationship that exists between the entity and the government. 4.20 Obtain the annual reports of two companies in the forestry industry (usually available from company websites) and consider the items included in biological assets. Answer the following questions. (a) What range of measures is used to determine amounts for these items in the reports of the individual companies? Do you think it is valid to add the items, given the measures used? How would you interpret the total amount for biological assets in the financial statements? (b) Compare the measures used by the different companies for similar items. Are there any inconsistencies in how similar items are measured by the different companies? (a) The range of measures used will vary depending upon the annual reports selected by the students and the nature of the biological assets held by the entity. Students should however be able to describe succinctly the approach/approaches taken in measuring the company’s biological assets. If there is a wide range of measures used it may also be useful for students to think about and comment on why this is necessary. Adding items determined using different measurement approaches gives rise to the additivity problem. It is not really logical to derive meaning from the total figure when a range of different measures are used. Even if the same measurement approach was used to determine the amounts for all biological assets, the fact that the amounts were most likely determined at different points in time, makes the total less meaningful. (b) Responses will obviously vary depending upon the combination of reports selected by students. It is important to get students to tease out why any identified inconsistencies have occurred and develop their thoughts as to whether such inconsistency is justified. 4.21 Find a current discussion paper or proposal on the IASB website. Discuss the measurement issues raised in the paper and examine the importance of resolving these issues from a standard-setting perspective. Responses to this question will vary depending upon what is on the IASB’s agenda at the time. It is important that students are able to identify and summarise the measurement issues raised in their selected paper, extending their discussion to incorporate analysis of the consequences of issues raised and explain why resolution is important. 4.22 Find the comment letters received on a current proposal or discussion paper on the IASB website and answer the following questions. (J, K, SM) (a) Have any of the comment letters referred to measurement issues? (b) Identify the key stakeholder groups. Establish whether there is agreement or disagreement within these groups and between the different groups, as to the appropriate measurement method to be used. (c) Are there any major concerns in relation to measurement? Do you agree or disagree with the comments made? (a) Responses to this question will vary according to the proposal or discussion paper selected by the student. The nature and extent of the discussion will depend upon what is out for comment at the time. (b) Relevant stakeholders should be clearly identified and points of consensus and inconsistency discussed in some depth. It is important that students look for consensus and inconsistencies within each stakeholder group as well as between the different stakeholder groups. (c) It is important that students are able to identify and explain the key concerns in relation to measurement. It is also important that students take a stand as to whether they agree or disagree with these concerns and are able to justify their view. Students might find it interesting to think about and consider the motivations underlying stakeholder concerns. Case study questions Case study 4.1 What price for James Price Point? Questions What is a heritage asset? Should James Price Point be considered a heritage asset? Does it meet the criteria for recognition as an asset? Explain how we could measure James Price Point to determine its value. Is it appropriate to place a monetary value on natural beauty? Is it really necessary? What are the practical difficulties in measuring an asset of this kind? Which is most important: economic growth and development, or preservation of the natural environment? Can we achieve both? Use evidence from the article to support your response. Heritage assets are tangible items associated with our cultural or natural environment that communities desire to preserve. Students should link features of James Price Point such as its natural beauty, evidence of fauna and marine life, flora and indigenous culture back to this definition to explore whether it meets the definition of a heritage asset. Students should refer back to the definition and recognition criteria for assets set out in the conceptual framework to develop an argument for why it should or should not be recognised as an asset. Students should think through the appropriateness of each potential measurement method. Cost, fair value, etc.… Arguments and logic will vary between students and hopefully this question will generate some good debate. Fair value likely to be the most likely argument. This would be quite a subjective estimation and it would be good to get students to explore the potential consequences of this. Is it appropriate or necessary? Student responses will vary here. Encourage them to argue this out amongst themselves. Practical difficulties could include the absence of an active market, the absence of a revenue stream to predict future economic benefit, difficulties in tracking and estimating costs associated with the asset in dollar terms and the fact that the nature of the asset is that it is constantly changing and developing in its own natural way. In other words, because it is part of our natural environment, what it has to offer is always changing. What is was perceived to be worth a year ago could be quite different to the dollar amount that would reflect its true value today. Both are necessary and we can argue that one is no more important than the other. Stable economic performance and growth is necessary for business survival while preservation of the environment is important from an ethical and sustainability perspective. Students should use the case of James Price Point to demonstrate this conflict. With appropriate planning and strategy we should be able to achieve both. Get students to argue out amongst themselves whether they think it would be possible to achieve both in this particular situation. Solution Manual for Contemporary Issues in Accounting Michaela Rankin, Kimberly Ferlauto, Susan McGowan, Patricia McGowan 9780730343530
