UDE 2011 Accounting Theory and Contemporary Issues

Chapter 5 Tutorial Answer

1. The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
2. A.
3. Fair value has an observable and active market reference value under the principle of mark-to-
market, so it can better reflect the current real value, be more objective, and avoid misleading
and reduce bias. The dynamic characteristics of fair value can dynamically reflect the impact of
economic factors and environmental changes on enterprises. The application of IFRS 13 achieve
a relatively uniform international standard for fair value. The convergence of fair value
standards in different countries has greatly improved the comparability of enterprises in
different countries in comparing accounting information.
4. Historical cost is the cost at which transaction was done or asset was required while fair value is
the present market price that asset can fetch. Depreciation is always getting calculated on
historical cost, while impairment is always calculated on fair value basis. Layman can easily
identify the historical cost as it is nothing but the transaction price, while professionals/
actuaries are needed to calculate the fair value.
5. Historical cost measurement cannot reflect the value-added process, cannot change with reality
and become less reliable and cannot measure future transactions of derivative financial
instruments without specific forms.
6. Fair value can not guarantee reliability: fair value input data consists of three levels but is not
uniquely determined. Fair value is subject to market environment, legal supervision, and human
factors, may not guarantee the reliability of fair value.