Question

Case 7-4 Measurement Techniques (Page 245)

The measurement of assets and liabilities on the balance sheet was previously a secondary goal to determine income. As a result, various measurement techniques arose to disclose assets and liabilities.

Required:

Discuss the various measurement techniques used on the balance sheet to disclose assets and liabilities.

Answer 1

The measurement of Assets and Liabilities depends on the way information is presented for the expected future benefits to be consequent from holding these assets and liabilities would be more beneficial to the users needed. Let us be more clear how to measure on assets and liabilities individually.

Assets : Basically assets are current assets, liquid assets and Fixed assets. For liquid assets like cash the measurement would be on current value, because it is very short term and current market value would be good approach to measure. Similarly for Current assets like Trade debtors the expected return in future would be best fit approach as the collection is dependent on future period. For inventory, the measurement wold be current or past, as the inventory has been purchased / produced already and the market value or cost needs to be valuated basis on already incurred cost / expenses. For PPE (Fixed assets) the measurement would be cost adjusted with depreciation, i.e., the current value of fixed asset will be calculated by actual cost of the asset less depreciation ( exception for Land) for Land, the Future discounted cost of the value should be calculated.

Liabilities : The liabilities should measured on the basis of discounted present values there can be other valuation bases like replacement value, realizable value etc. In case of current liabilities discounted procedure should not be followed because the amount of payment is known with certainty and time period involved is almost negligible.

For example. Capital / Owners equity, the value of the capital or Owner's equity will be measured on the basis of present value in the future returns to calculate the fail value of ROI.

For Trade liabilities, similar to Trade debtors, the time of repayment is know and cannot be discounted.