What does value mean for accountants, and how is it measurement.

1. LO 2: Value and measurement in
accounting
1 Created by Dr G. L. Ilott, CQUniversity Australia

2. Why is "value" important?
Every business profession sees a business
differently.
• A HR manager sees a business as its
people.
• A marketer sees a business as its brand.
• An accountant sees a business as the
sum of its value.
2 Created by Dr G. L. Ilott, CQUniversity Australia

3. What is the problem with "value"?
Different people see value differently. It is hard to find an objective measurement for
"value".
And accountants must have objective measurements!
"Value" is actually a metaphysical state. That means, it is something that exists beyond
an object's physical presence. Philosophers have debated metaphysics since Plato (d.
423 BC). Accountants are relatively late to the party, but are finding the issue no less
perplexing than have generations of the brightest philosophers known.
So if you are find this topic rather bewildering, you are in good company. Its just that
now you know why it is bewildering.
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4. How do accountants deal with value?
Accountants follow some simple rules:
• Be objective (meaning that you should be able to point to evidence of why and how an asset was
valued that way, how the value was derived).
• Be consistent as much as possible so that elements of the financial statements can be
compared.
• Follow generally accepted methods or principles (in other words, don't make it up as you go).
• Tell a good story:
• Have the managers been good and managed the firm's assets well (the stewardship
approach)?
• Is the information useful for investors (decision usefulness approach)?
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5. Which is the better approach, stewardship or decision
usefulness?
Financial statements should reflect both. A reader of the statements
should have an idea of the effectiveness of managers as stewards and
find the information useful.
The different approaches are mentioned because different valuation
methods are typically motivated by one outcome more than the other.
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6. A quick comparison of methods
We will meet these methods later in LO 3. However, here is a quick comparison in terms of stewardship or decision usefulness.
Valuation method Stewardship or Decision usefulness?
Historical cost Stewardship
CPPA Stewardship
CCA Stewardship
CoCoA Stewardship, tending towards Decision Usefulness
Fair Value Decision Usefulness
The stewardship approach focuses more on showing the true performance (over time) of the firm's assets, and therefore the performance of the firm's managers in preserving its capital base.
Decision usefulness approaches focus on presenting values in the most useful format. Exit prices are thought to give the most contemporary measurement of "true value".
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7. What are the bases for measurement?
Different approaches to value and methods of measuring value work off different bases that represent "value". Here are some of the prominent bases.
Basis of value Explanation Favoured by…
Historical cost What was originally paid for an asset cannot be
disputed. It is therefore both simple and highly
objective as a basis for measuring value. However, it
has many problems.
Historical cost accounting. CPPA uses historical cost
adjusted by price indices such as inflation indicators.
Entry price (Current Cost) The price that would be paid to acquire the asset
now. Thought to be a good indicator of what the
market thinks of your asset right now. But what if
that asset can no longer be bought?
CCA
Exit price The price the market would pay now if you sold the
asset in an orderly, arms-length sale.
CoCoA and Fair value accounting.
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8. Some other measures of value that are considered
Measurement Explanation
Current costs The cost to replace an asset—the entry price.
Realisable value The value that could be "realised" if the asset was disposed of. AKA Exit
value.
Recoverable amount The higher of (1) Fair value - selling costs, and (2) Value in use.
Value in use The expected future cash flows from the asset adjusted for present value.
Deprival value The loss the firm would face if it was suddenly deprived of the asset. It is
represented as the lower of (1) the asset's replacement (current) cost and
(2) the asset's recoverable amount.
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9. Mixed measurement
The Australian accounting standards (based on IFRS) allow for a mixed measurement approach.
A mixed measurement model is one where no one basis of measurement is prescribed for all classes of assets & liabilities.
• Assets can be valued at historical cost or fair value
• Some liabilities can be valued at present value.
This allows for the most appropriate measurement to be used according to the situation, but there are real problems too:
1. It reduces comparability of financial reports (apples vs. oranges)
2. Additivity problem: The assets & liabilities that make up net assets are all valued differently. Can they really be added/
subtracted?
3. The choices can be exploited by opportunistic & unscrupulous managers.
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10. Moving on…
In LO 3, we will explore some of the different measurement methods
and what they are trying to achieve. Most are not allowed under IFRS,
but they do provide informed discussion of strengths/weaknesses of
different approaches.
10 Created by Dr G. L. Ilott, CQUniversity Australia