ASSETS AND THEIR
MEASUREMENT
ACCOUNTING THEORY –
HENDRIKSON &VAN BREDA
(Pertemuan 11)
MEASUREMENT PROCESS
• Measurement is the process of assigning
meaningful quantitative monetary amounts
to object or event related to an enterprise and
obtained in such a way that they are suitable
for aggregation (such as valuation of assets)
or disaggregation as required for specific
situation.
• Measurement is usually thought of monetary
terms, but nonmonetary data should not be
forgotten (poductive capacity, numbers of
employees)
• Measurement Bases :
Input Values
Output Values
Past
Historical Cost
Past Selling Prices
Current
Replacement Cost Current Seling Price
Future
Expected Cost
Expected Realizable
Value
• Exchange Price (market price) should be relevant to
external reporting. There are two type of exchange price or
value (output & input value)
• Revaluing assets: contract point, delivery point, collection
point. When assets are revalued, new measurement
bases are necessary.
INPUT MEASURES
• Represent the amount of cash/value, paid
when an asset/its services enters the firm by
an exchange or conversion:
• Historical cost: the aggregate price paid by
the firm to acquire ownership and use of an
asset. The main disadvantage is the value
of the asset may change over time.
• Prudent cost: only the cost that normally be
paid for property by reasonably prudent
management. The concept has been used
by public utility regulators, general valuation
of asset, & acqusition of retail merchandise
• Standard Costs: under certain assumption
regarding desired level of productive efficiency &
capacity utilization.
• Original cost: cost of property to the firm first
devoting it to public service.
• Current Input Cost: exchange price that would
be required todqy to obtain some asst or its
equivalent.
• Appraisal value: estimated value of current cost
or current value using systematic procedures.
• Fair value: total amount on which the investor
are entitled to earn a fair return.
• Net realizable value less a normal mark up
• Discounted future input cost
Output Measures
•
•
•
•
•
1.
2.
3.
4.
Net realizable values
Current cash equivalent
Liquidation values
Discounted future cash or service potential
LCM, but many believe it’s unacceptable:
Tend to understate total asset valuation
Larger reporting profit or smaller lost
Internally inconsistent
There may not be any changes in net
realizable value just because cost have
changes
Objective of Measurement
• Syntactic Objectives:
1. Measurement & Matching: to obtain a basis for
the computation of the gross operating margin
and the income from all transaction.
2. Measurement & accretion( income accrues to a
firm in absence of capital transaction): to
approach the ouput value & cash value as soon
as the basic service has been performed by the
firm as soon as verifiable measurement can be
obtain
• Semantic Objective : to ensure that all measures
used in accounting are representationally faithful
Objective of Measurement
•
1.
2.
3.
4.
Pragmatic Objectives: focus on relevance
& usefulness of accounting:
Relevance for creditors (liquidityliquidation value)
Relevance for equity holders (right &risk)
Relevance for managers (operating
decision)
Reliability