The traditional approach has been used to measure assets at historical cost. Historical cost has been firmly embedded in Generally Accepted Accounting Principles (GAAP). The cost model reflects a conservative approach to assets measurement. The MFRS standards permit subsequent remeasurement of tangible assets including MFRS 116 Plant, Property and Equipment and MFRS 140 Investment Property. These standards permit, but do not require, the use of current value measurement model.

Measurement can be based on market value provided by the professionally qualified appraiser or may be estimated by the entity based on an income or depreciated replacement cost approach. Revaluations must be kept up to date at each balance date. Similarly, in relation to MFRS 140, managers can choose the cost model or the fair value model for measurement after recognition (para 30).

Scenario:

Alpha Sharp has maintained its accounting system on historical cost basis. However, because of continuing inflation, it has decided to prepare financial reports on a current market buying basis.

Required:

1. a) Instead of the continuing inflation reasons, outline FOUR (4) more possible reasons

   Alpha Sharp choose to prepare its financial reports on a current value basis.
   b) Describe THREE (3) basic concept of historical cost accounting that been violated if Alpha Sharp prepare financial reports on current market buying basis.

2. c) The selection of measurement method (historical cost, current cost and exit price) influences the qualitative characteristic of financial information (Faithful representation, relevant, reliability, comparability) in the financial reports. Explain to Alpha Sharp regarding this issue.

d) By using current value basis, the entity will recognize holding gains and losses. Explain to Alpha Sharp why holding gains are a component of profit.

Answer rating: 100% (QA)

A historical cost could be a measure valuable utilized in accounting within which the worth of an asset on the record is recorded at its original cost when acquired by the corporate The historical cos... View the full answer