According to the Conceptual Framework for General Purposed Financial Reports (GPFR), the objective of a measurement in financial reporting in public sector entities is to select those measurement bases that most fairly reflect the cost of services, operational capacity and financial capacity of the entity in a manner that is useful for accountability and decision-making purpose.
Required:
Explain the under listed bases and discuss the extent to which each measurement reflect the cost of service, operational capacity and financial capacity of an entity. (9 marks)
i) Historical cost
View Solution
Historical cost is the consideration given to acquire or develop an asset, which is the cash or cash equivalents or the value of the other consideration given, at the time of its acquisition or development. Historical fairly reflects the:
- Cost of service by providing information on the amount of the resources expended to acquire or develop assets consumed in the provision of services.
- Operational capacity through information on the resources available to provide services in future periods based on their acquisition cost.
- Financial capacity by providing information on the amount of assets that may be used as effective security against borrowing.
ii) Market Value
View Solution
Market value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Vehicle is traded in the open, active and orderly markets so obtaining the market value is practicable. Market value fairly reflects the:
- Cost of service by allocating the cost of assets to reflect their consumption in the current reporting period based on current market values of the vehicles.
- Operational capacity by providing information on the market value of assets held to provide services in the future periods.
- Financial capacity by providing information on the amount that would be received on the sale of the assets.
iii) Replacement cost
View Solution
Replacement cost is the measurement basis that fairly reflect the cost of service, operational capacity and financial capacity of the library books. Replacement cost is the most economic cost required for the entity to replace the service potential of an asset at the reporting date. The use of replacement cost fairly reflects the:
- Cost of service to be equivalent to the amount of sacrifice of service potential incurred by that use.
- Operational capacity by the resources available to provide services in future periods, a sit focused on the current value of the assets and its service potential to the entity.
- Financial capacity is not reflected by replacement cost basis as it does not provide information on the amounts that would be received on sale of asset.