The paper 'Conceptual Framework Issues' is a great example of a Finance and Accounting Assignment. Paragraph 18 of The Measurement Principle requires that “ the acquirer shall measure the identifiable assets and the assumed liabilities at their acquisition-date fair value. ” (NZ IFRS, par. 18; External Reporting Board, 2012). With regard to the underlying provisions of this principle, it is required that all the identifiable assets and assumed liabilities have been recognized to be valued at the market value. According to IFRS 13, fair value is a price that would be received to sell an asset or paid to transfer liabilities at the market measurement date. ” Also, the date at which such valuations should be carried out is that date when the transfer of ownership is taking place.
Therefore, the measurement basis of the software, fixed assets, and other liabilities that are present in the books of B Ltd is the above principle of measurement provided in NZ IFRS. If the conceptual framework does not recognize the fair value measurement basis then measuring the assets acquired and liabilities assumed at fair value is inconsistent with the conceptual framework.
This implies that the fair value would give inconsistent results in the context of a conceptual framework application. The fair value assumes that the market is perfect and complete and that it can meet the need of investors and shareholders (Whittington, 2008). However, the conceptual framework views this approach unrealistic since markets can never be perfect and complete. Therefore, it would be useful to adopt a more rational measurement basis. The value of the 388,000 ordinary shares is issued at the market fair value. The reason is that the IFRS paragraph 37 requires that “ the consideration transferred in business combination shall be measured at fair value. ” The IFRS also categorizes the ordinary shares as an example of consideration transferred.
Hence, since it is recognized as a consideration, then it qualifies to be valued at fair value at the acquisition date. Importantly, paragraph B64(f) provides that the acquirer should disclose the fair value of the total consideration (Tsalavoutas, André & Dionysiou, 2014). The IFRS 13 tries to ensure consistency and disclosure through the fair value hierarchy technique. This approach organizes the fair value inputs into three-level with the least significant being at the bottom of the list (Fornaro & Barbera, 2007).
The potential hierarchy of the fair value that I used is as follows: Ordinary Shares: The ordinary shares for company “ A” limited have a quoted price that is observable. It, therefore, falls under level 1 inputs of the fair value. Fixed Assets: Since the price is quoted and is observable, certain inputs that can be used in the measurement of fair value can be obtained directly or indirectly. Therefore, they fall under level 2 input. Liabilities: The liabilities’ quoted market value represents the input that can be observable or not. Software: The price is quoted but the input that leads to the calculation of the market fair value cannot be directly or indirectly obtained. If the fixed assets fair values are $250,000 and $300,000 as at 30 June and 31 October 2014 instead of $400,000 and $500,000 respectively, then the financial statement will be affected in two ways.
Firstly, during the acquisition date, A’ s total fixed assets value would be less than it would have been.
There would also be an incremental depreciation value that will affect the income as of the transaction date. In the period after the acquisition, A company’ s depreciation policy would incorporate the depreciation that was used by B limited into theirs. Question 2. IASB project The ED 2015/3 provides more guidance on the concept of stewardship. The management’ s stewardship has been described to include an element in the assessment of economic resources and financial performance changes. According to Christensen (2010), the new proposal’ s objective of the conceptual framework is to expand and include the information about management’ s ability to protect and enhance the owners’ resources.
The users of financial statements and their respective interests have also been described well. Therefore, the provision in the exposure draft states that the conceptual framework is aimed at giving more prominence to objective financial reporting so as to ensure that information regarding management stewardship of the entity’ s resource is now clear than ever. Another area of concern is that the issues of measurement uncertainties have also been clarified. The ED 2015/3 states that the measurement uncertainties are less relevant and it is usually off-set by relevant information available.
In addition, the concept of prudence has been revised and conceptualized in a clearer manner. Other important areas include the definition of elements in the financial statements such as assets, liabilities, equity, and income. Also, the recognition and DE recognition and presentation, and disclosure are key areas that provide more guidance. The ED defines an asset as a present economic resource that is controlled by an entity as a result of past events (IAS Plus, 2015). The current definition does not recognize an asset as an economic resource but it refers to its future economic benefits.
The use of “ future economic benefits” was considered as a term that would cause confusion when it comes to the definition of liability (IAS Plus, 2013). Therefore, the ED simplifies the definition to refer to assets as economic resources but not the flow of economic benefits. The current definition also considers an asset as a past event but the ED requires that an asset be considered as a present resource. The ED proposes a variety of changes regarding the measurement.
Firstly, it requires that the basis for selecting a measurement option should include the factors associated with the initial measurement, qualitative characteristics, relevance, and faithful presentation (IAS Plus, 2015). Furthermore, the measurement uncertainties have been considered as less irrelevance and that companies should focus on the relevance of the information that off-sets the measurement uncertainties. Another proposal is that the measurement will include the fair value (which is disregarded in the conceptual framework), historical costs, and costs in use. Another proposal is the disclosure and recognition of the fair value.
It requires that the fair value be disclosed in one of the three-level of fair value measurement hierarchy. Information to be used during the disclosure includes: Quantitative information Reconciliation information. That is the reconciliation of the opening and closing balances Description of valuation adopted by an entity.
Christensen, J. (2010). Conceptual frameworks of accounting from an information perspective. Accounting and Business Research, 40(3), 287-299.
External Reporting Board, (2012). For-profits standards. Retrieved from https://www.xrb.govt.nz/accounting-standards/for-profit-entities/
Fornaro, J. M., & Barbera, A. T. (2007). The new fair value hierarchy: key provisions, implications, and effect on information usefulness. Review of Business, 27(4), 31.
IAS Plus, (2013). Conceptual framework-Definition of elements. Retrieved from https://www.iasplus.com/en/meeting-notes/iasb/2013/february/cf-elements
IAS Plus, (2015). IASB publishes Exposure Draft of a new Conceptual Framework. Retrieved from https://www.iasplus.com/en/news/2015/05/cf-ed
IFRS 13. Fair value measurement. Retrieved from https://www.iasplus.com/en/standards/ifrs/ifrs13
IFRS. Request for information and comment letters—Post-implementation Review—IFRS 13 Fair Value Measurement. Retrieved from http://www.ifrs.org/-/media/project/pir-ifrs-13/published-documents/request-for-information-pir-ifrs-13.pdf
Tsalavoutas, I., André, P., & Dionysiou, D. (2014). Worldwide application of IFRS 3, IAS 38 and IAS 36, related disclosures, and determinants of non-compliance.
Whittington, G. (2008). Fair value and the IASB/FASB conceptual framework project: an alternative view. Abacus, 44(2), 139-168.