Question 1 The assertion that standard setters are confused since they have developed different techniques to measure different types of assets is obnoxious. Asset valuation is a method of assessing or estimating the worth of an item. Standard setters in accounting have formulated different methods of acquiring the worth of different classes of assets which serve their purpose perfectly. Valuation on financial assets is done using various models. Financial assets can be measured using one or a combination of these models, namely the absolute value models, relative value models and the option pricing models.
The absolute value models are used to determine the present value of the expected future cash flows of an asset. These models can either be multi-period models such as the discounted cash flow model or single period models such as the dividend discount model. The discounted cash flow method uses the time value of money concept to calculate the present value of the assets. The dividend discount model on the other hand computes its valuation based on the supposition that stock is worth the discounted total of all of its future dividend payments (Gordon, 1959, pp 99–105).
Relative value measures the attractiveness of an instrument in terms of liquidity, risk and return relative to another. This is a common occurrence in hedge fund management where they exploit the benefits of mispricing between two related securities. Options depend on several different variables making them complex to value, however there are several pricing models employed to assist with this. This is done since value fluctuates over time and is therefore computed as of a specific date. In finance valuation is required for many purposes including business analysis, basic bookkeeping, tax assessment and divorce settlements. There is a class of assets referred to as intangible assets.
These also require valuation although it can be very difficult to assess their cost. With the virtue of being intangible, most valuation of intangible assets is done qualitatively an not quantitatively. Some of the methods used to measure intangible assets include balanced score card, competency models, relative value, benchmarking, brand equity valuation and the calculated intangible value. Question 1b Contingent assets are assets that crop up from past events but whose reality will only be established by the happening of future proceedings that are devoid of the firm's control (Australian Accounting Standards Board, 2010, p19).
Prior to the AASB 137, contingent assets were not required to be recognized in the financial statements since they were not certain assets and may have resulted in the recognition of an income that may never be realized. AASB 137 dictates that a contingent asset should not be recognized in the financial statements, however, when it is virtually certain that the income will be realized, the asset in question is not termed as a contingent asset and therefore it should be appropriately recognized.
A contingent asset is recognized only when an economic inflow of benefits is feasible (Australian Accounting Standards Board, 2010). At the end of the financial period, the entity should disclose a short account of the makeup of the contingent asset. The financial effect is also estimated where possible. It is nonetheless important to note that the disclosures for contingent assets should be done in such a way that they do not give misleading indications on the probability of a rise in income.