Solutions manual

to accompany

Contemporary issues in
accounting
2 edition
nd

by

Rankin, Ferlauto, McGowan and Stanton

Prepared by
Kimberly Ferlauto

© John Wiley & Sons Australia, Ltd 2018

Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

Chapter 4: Measurement

Contemporary issue 4.1

The standard setters search for the ‘best’ measurement basis

Questions
1. What is meant by the term market context? Why is context so important in
accounting measurement?
2. Is adoption of a single measurement base approach likely to work in practice? Justify
your response.
3. Why do you think standard setters have considered a single measurement base
approach? In your response, consider the fundamental problems that such an
approach could help resolve and how such an approach would fit with the qualitative
characteristics of accounting information prescribed under the Conceptual
Framework.

1. Measurement methods used in the preparation of the financial statements should be

selected with the market context in mind. Values determined without market context in mind
may not be reflective of market conditions or meet user’s needs. In other words, to provide
the most accurate and decision useful accounting information, the most appropriate
measurement approach is likely to be dependent on specific circumstances such as the nature
of the market for the asset at the time. If the market is to play a role in valuation, we want to
ensure that the resulting value reflects the fundamental value of the asset and that the
operation of market forces does not lead to over or under valuation of the asset. What is
important to users may also change from time to time.

2. Responses to this essay style question will vary from student to student. Students should be
encouraged to form their own views and provide in depth discussion supported by references
and examples. Some key points of relevance include:
 Arguments for adoption of a single measurement base approach are based on an
idealised view of markets being complete and in perfectly competitive equilibrium.
In reality, markets are imperfect and incomplete and ideal unique market prices are
not available for all assets and liabilities. This has led to the use of the fair value
hierarchy. The lower levels of the hierarchy requiring estimation of what the market
price might be if one existed. The information produced is therefore not ideal.
 A single preselected measurement method may not best reflect market conditions or
meet user needs at that time.
 Assumes a particular measure will always be the most relevant and will always be
able to be reliably measured.
 Some argue that there is no single ideal measure and that the focus should be on
identifying the information that is most likely to meet the needs of user’s decision
models.
 Application of IAS 39 during the recent GFC as an illustration of the practical
importance of market imperfection and incompleteness.

3. Responses to this essay style question will vary from student to student. Students should be
encouraged to form their own views and provide in depth discussion supported by references
and examples. Some key points of relevance include:

© John Wiley and Sons Australia, Ltd 2018 4.1

 Chapter 4: Measurement

 In perfect market conditions, there is a unique market price based on full information
for every asset and liability. This provides a relevant, reliable and objective measure
of an assets fair value when such observable market prices are available. This
argument seems to be a key driver behind the push for fair value as the single ideal
measurement base approach.
 Mixing different measurement bases is believed to create mismatch problems. This
problem refers to the fact that different items in the same set of accounts are measured
on a different basis, making aggregation (totals) misleading. A single measurement
base approach would promote consistency within accounts, avoiding this mismatch,
and allowing more meaningful aggregation. This approach would also improve
comparability of accounts between different entities.
 Fair value favoured approach due to its relevance – measures market expectations of
future cash flows to be derived by the entity and objectivity – reflecting the markets
view rather than views of management associated with the entity.

© John Wiley and Sons Australia, Ltd 2018 4.2

Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

Contemporary issue 4.2

The subprime lending crisis and reliable reporting

Questions
1. In practice, which measurement base, historical cost or fair value, would provide the
most relevant and reliable accounting information? Draw on the facts presented in
the situation above, as well as your knowledge of the global financial crisis, to justify
your response.
2. Discuss the role of market stability and the financial business cycle in determining
the relevance and reliability of the accounting information produced.

1. Responses may vary from student to student as there are many paths that discussion could
take. Some key discussion points follow.

 Fair value or historical cost on their own, are not likely to achieve both
characteristics.
 Inherent trade-off between relevance and reliability – the information which is most
relevant is often less reliable. The information which is most reliable tends to be that
which is less relevant.
 There has been a move towards fair value and away from historical cost on the basis
of relevance. It is argued that reporting assets and liabilities at their fair values
provides more relevant information for investment decisions than historical cost.
 Reliability is difficult to achieve under fair value when we are dealing with
hypothetical transactions that are not objectively measureable. This is the situation
we face when observable market prices are not available. In other words, when an
active and liquid market does not exist for the asset. Some argue that once reliability
becomes compromised, the information produced also becomes less relevant.
 Integration of the two measurement bases suggested. For example, historical cost
financial reports could be enhanced by providing fair value information through
footnote disclosures. A balance to achieve both greater relevance and reliability.

2. Market stability and the nature of the financial business cycle play a large role in the
determination of market prices, and therefore impact upon the relevance and reliability of
accounting information produced using fair value.

Falling prices in an unstable market may worsen market stability. Companies tend to react to
falling prices by rushing out to sell their assets before their competitors, causing a further
downward spiral in prices.

In a market bubble, values may be overstated, and values will most likely not be realisable if
many market participants decide to sell those assets at the same time. The bubble bursts and
prices fall again.

Financial statements measuring assets and liabilities at fair value in unstable or illiquid
markets are not likely to be relevant or reliable for the purpose of decision usefulness.
Students may refer to the subprime lending crisis or other examples to illustrate the role of
market stability and the financial business cycle.

© John Wiley and Sons Australia, Ltd 2018 4.3

 Chapter 4: Measurement

Contemporary issue 4.3

Serving the public interest

Questions
1. Explain the impact of globalisation and conflicting commercial and public interests
on measurement choices made by accountants.
2. Why is acting in the public interest so important when it comes to measurement? Do
you agree or disagree with the statement that public interest is a quaint and
unnecessarily restrictive notion of the past?

1. It is becoming increasingly common for there to be little or no thought as to the role of the
accounting profession in society and the interests of the public. Accountants face a huge
conflict of interest where their loyalties are torn between the commercial interests of their
employer and the public interest. With globalisation come opportunities, greater competition,
and therefore a greater need to report desirable results. The question is does pursuit of these
opportunities come at the expense of acting in the public interest.

One of the key factors driving measurement choice is management’s motivations and
objectives. In the article it is argued that accountants are becoming more commercially
minded and public interest is now an unnecessarily restrictive notion of the past. They are
focused on fulfilling the entities commercial interests and this is what influences their choices
with regard to accounting measurement. For example, if a particular profit target has been set,
in the interests of self-preservation and a desire to impress management will lead to
accountants choosing the measurement method which will result in the largest reported profit.
Whether use of this measurement method results in figures which provide a true reflection of
reality or how these reported figures would impact decision making of other stakeholders and
the general public would generally not be given a second thought.

It would be interesting to get students views on this reality check and see if they can come up
with some more examples.

2. Acting in the public interest is so important when it comes to measurement because our
choice of measurement method impacts the picture of reality we paint for users of the
financial statements. If this reality is not a true reflection of the entity, users will make
inappropriate decisions that could be detrimental to their interests.

Responses to the latter part of the question may vary between students. The important thing
here is to encourage students to take a stance and justify their position by making reference to
relevant theories and real world examples such as General Motors.

© John Wiley and Sons Australia, Ltd 2018 4.4

Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

Review questions

4.1 Define measurement in the context of accounting and financial reporting. (LO1)

The Conceptual Framework defines measurement as:

The process of determining the monetary amounts at which the elements of the
financial statements are to be recognised and carried in the balance sheet and income
statement.

Measurement in an accounting context therefore refers to the way the figures on the financial
statements are determined. It is described as an act or process which may involve
calculations, making estimates and comparisons, and apportioning or distributing amounts.

4.2 Why is measurement so important in accounting? (LO1)

Measurement is crucial to be able to provide decision-useful accounting information and to

accurately appraise the performance of management. These are the primary purposes for
which financial statements are prepared.

The way items are measured in accounting impacts on the quality of accounting information
produced. In order to fulfil the decision-usefulness objective, the financial statements
produced must contain good quality accounting information which will assist decision
makers in making the right (appropriate) decisions. Poor quality accounting information,
resulting from the use of inappropriate measurement methods, may mislead users and this
could potentially cause them to make wrong (inappropriate) decisions. If accounting
information leads to wrong or inappropriate decisions it is not useful.

The financial statements produced must also contain good quality accounting information in
order to accurately determine how well management has performed its role in managing the
resources of the entity. Poor quality accounting information, resulting from the use of
inappropriate measurement methods, will give the wrong impression as to how well
management has performed its role.

4.3 Discuss the current approach to measurement adopted by standard setters. Why
have they adopted such an approach? What are the issues and problems
associated with this approach? (LO2)

Under the international standards we adopt what we call a mixed measurement model. Under
this approach a number of different measurement bases are employed in the preparation of
the financial statements. Historical cost, current cost, realisable value and present value are
all employed to different degrees and in varying combinations during the preparation of the
financial statements.

The main reason for adopting such an approach is the need for flexibility. This model allows
for use of a number of different measurement bases. This is necessary due to the differences
in the substance or nature of transactions between entities and also due to the differing
circumstances that entities can find themselves in.

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 Chapter 4: Measurement

Issues and problems associated with this approach include:

 Variations in accounting practice – entities may choose to account for the same or
similar items in different ways using different measurement methods. How they
measure and account for an item may be appropriate for the individual entity but could
reduce comparability across entities.
 Potential for different financial results being reported when different measurement
methods are allowed and used.
 Discretion means opportunity for management to make opportunistic accounting
choices, creating a biased picture of reality and perhaps even misleading users.

In summary, the approach is necessary but subjective in nature. This highlights the
importance of professional judgement and ethics in accounting.

4.4 Explain the arguments for and against using historical cost as a measurement
base. (LO2)

Key arguments for historical cost include:

 Most objective measurement approach - amounts are determined based on actual
transactions.
 Clear audit trail – amounts can usually be proven by documentation.

Key arguments against historical cost include:

 Amounts determined may not be relevant to current decision making if there is a long
time span since the transaction occurred. Historical cost does not take into account
changes in the value of money over time. In other words, it ignores price inflation.
 The amount paid for an item or received for an item may not necessarily be indicative
of its value.
 Judgement involved in determining depreciation rates can create inconsistencies and
opportunity for manipulation.
 Inability to determine the cost of some items. Items may be donated with no actual
cost to the entity. Items may be internally generated rather than purchased.

4.5 Explain the difference between current and replacement costs. (LO2)

Current costs and replacement costs are both essentially the costs that would be incurred if
we were to replace the items now. However, these terms represent two different methods of
measuring the cost of replacing the items. Current cost requires the item be valued and
recorded at the amount that would be paid at the current time to provide the future economic
benefits expected to be derived from the current item. Replacement cost requires the item to
be valued and recorded at the amount that would be paid at the current time to purchase an
identical item.

Current cost is a broader concept in that it represents the cost of obtaining the same expected
future economic benefits, but these benefits may be assumed to be achieved in different ways,
not necessarily through purchase of an identical item. Replacement cost is much more
specific in that it represents the cost of purchasing another item identical to the current one.

© John Wiley and Sons Australia, Ltd 2018 4.6

Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

4.6 Explain the arguments for and against using fair value as a measurement base.
(LO2 and LO4)

Key arguments for fair value include:

 Most relevant measurement approach for current decision making. The amount that
will be received for an item or that will need to be paid for an item is decision useful
information.
 Objective if determined by reference to the market price for an item. The market price
is set by forces outside the entity. It is not biased by judgement and cannot be
manipulated or influenced by management.

Key arguments against fair value include:

 Subjective where a market price is unavailable. Some items are not regularly traded in
an active market and an estimate of the items fair value must be made.
 The focus on exit values is not logical and contradicts the going concern assumption.
We are measuring as though we are going to sell off all the assets, which is not
usually the case.
 Market prices can be volatile and therefore sometimes may not be indicative of the
true value of an item. Short term fluctuations in fair value may be irrelevant and cause
confusion from a user perspective.

4.7 What role does estimation and judgement play in accounting measurement?
Discuss with particular reference to present value. (LO2 and LO3)

The key issue to note here is that certain measurement methods are more subjective than
others. As a consequence, the relevance, usefulness and reliability of the accounting
information produced using these more subjective measurement methods becomes
questionable.

Present value is a good example because managements estimations of cash flows expected to
be received in the future can be quite subjective. The estimations are made at management’s
discretion and their internal biases may come into play. Assertions and assumptions are made
by management in forming such estimates, and for this reason, the values determined cannot
be assumed to be objective. Present value is also subjective in the sense that there are also a
wide range of discount rates to choose from. There is often much variation between entities in
the discount rates applied.

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 Chapter 4: Measurement

4.8 Identify factors that may influence the choice of measurement approach. Discuss
how the measurement approach adopted impacts on the quality of accounting
information produced. (LO3)

Key influences include:

 Potential users of the financial statements - user needs must be understood in order to
choose the measurement approach which will provide the most decision useful
information.
 Practical considerations – a particular cost or value may be too difficult or even
impossible to determine. Choice of measurement approach also needs to be cost
effective. The cost of obtaining or calculating the cost or value must be considered.
 Management’s motivations and objectives – motivations, underlying objectives and
time horizon can all influence management behaviour in terms of choice of
measurement approach. For example, if management have a short term focus, are on a
shorter term employment contract, or have bonuses tied to profits, they will most
likely choose the measurement approach which produces the best results in terms of
higher profits.

The measurement approach adopted impacts on the quality of accounting information

because it has a direct impact on the relevance, faithful representation, understandability,
comparability and verifiability of the information produced. Accounting information which
possesses these characteristics is more decision useful, therefore fulfilling the decision
usefulness objective, the purpose for which financial statements are prepared.

A detailed analysis of how each of the individual measurement approaches discussed in the
text impacts on the quality of accounting information can be found on pages 104-107.

4.9 Discuss why accounting measurement has become such a controversial issue in
recent times. (LO6)

In recent years there has been a significant paradigm shift in relation to accounting
measurement. There has been a distinct move away from historical cost toward fair value and
fair value is by far the most controversial measurement approach. Key reasons for such
controversy include:
 Subjective nature of estimates involved in determining fair value where no active
market exists for an item
 Role of management assumptions and judgement make accounting information
produced more prone to manipulation
 Variability in valuation techniques used between entities
 Volatility in earnings reported as a consequence of changes in fair value from period
to period
 Potentially misleading nature of the earnings figure produced under fair value

Some points regarding the controversial nature of accounting measurement in a more general
sense follow:
 Potential for inappropriate choices in measurement approach
 Variability in measurement approaches adopted for the same or similar assets
 Political influences on measurement decisions

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Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

 Subjectivity and discretion involved in determination of some values

 Impact of measurement on achievement of other organisational objectives

4.10 Why is accounting measurement described as political? (LO5)

Key points are as follows:

 Numerous different interest groups are involved in accounting regulation through the
standard setting process. The process incorporates lobbying by the different interest
groups with regard to measurement issues embedded within the standards. Interest
groups are often biased or influenced by self-serving objectives.
 Wealth transfers often provide the basis or incentive for decisions made in relation to
accounting measurement. Most parties and interest groups within our economy would
act to maximise their own wealth, not necessarily with the best interests of
stakeholders or the decision usefulness of information produced in mind.
 Validity and acceptance of use of fair value as a measurement approach in times of
economic downturn. Impacts on wealth within the economy need to be considered in
the sense that certain types of entities may be disadvantaged by the decision to adopt
fair value. The nature of an entities asset base and the transactions they undertake may
mean they are more vulnerable to economic downturn and the operation of the capital
market, causing them to report greater losses.
 Use of fair value has also revealed the truth in some circumstances, highlighting
losses that were masked by different accounting treatment adopted previously. This
has brought financial reporting into the public eye and made it a public concern.
 Reliability of accounting information produced using fair value as the measurement
base. Where no active market exists for an item, determination of fair value becomes
quite subjective. With discretion and judgement comes opportunity for potential
manipulation of values. This issue has been highlighted in recent corporate collapses
where the complex interactions of individuals within society and consideration of
what motivates them to make particular accounting choices and decisions has come
under great public scrutiny.
 Accounting has been the scapegoat for many circumstances which have had far
reaching impacts on the public. Views put forward in the literature have been
inconsistent in that they are largely dependent on what issues are currently prevalent
in the political arena. Players seem to change their view and opinion of the
appropriateness of the various measurement approaches depending upon current
political objectives and what needs to be achieved. In this sense, we can view
accounting measurement as a political tool.
 Difficult nature of managing the political relationships that arise due to stakeholders
conflicting interests. For example, the conflict that arose between regulators and
banks in the context of the recent GFC.
 Inadequate operation of financial markets, resulting in prices which are not
necessarily indicative of market value. For example, during the GFC agency ratings
were a key information source and therefore played a major role in the markets
determination of price. The fact that the ratings agencies were paid by the entities
means ratings given were not necessarily reflective of true risk and the whole market
mechanism fell apart. In situations such as this, we even begin to question the
accuracy of market prices and the whole market mechanism which we have come to
rely on comes under scrutiny.

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 Chapter 4: Measurement

4.11 In your own words, explain what different stakeholders want from financial
statements. Consider whether the measurement approach adopted impacts on
the extent to which accountants are able to fulfil stakeholder needs. (LO5)

Different stakeholders all want something different from the financial statements. These
differing needs must be considered and balanced out in the preparation of the financial
statements.

Existing and potential investors are concerned about two key things. The risk they are
exposing themselves to and the return they can expect from their investment in the entity.
They want accounting information that will assist them in deciding whether to buy, hold, or
sell their shares in the entity. They also want accounting information which will help them to
assess the entities ability to pay dividends. In other words, they are interested in the potential
value and future viability of the entity, with a particular interest in current values and the
entities ability to generate profits.

Lenders and other creditors want accounting information that will enable them to determine
whether amounts owing to them will be paid when due. They are therefore most interested in
the entities net position, the amount of liabilities it has compared to the assets it holds. They
want information that reflects the current value of assets and liabilities, giving an indication
of the future viability of the entity.

There is a need for adoption of different measurement approaches in order to satisfy the
needs of key stakeholders. In fact, even an individual stakeholder demonstrates a need for
accounting information based on more than one measurement approach. It is evident that an
appropriate measurement approach needs to be considered in context and is very much
dependent upon the entity, its objectives and current circumstances. This reinforces the need
for a mixed measurement model in order to satisfy stakeholder needs.

4.12 What is our primary objective when accounting for heritage assets? (LO7)

Heritage assets are tangible items associated with our cultural or natural environment that
communities desire to preserve. One can argue that the primary objective for which the asset
is held should drive how it is measured. Therefore, being clear on our primary objective is
important. If our objective is to maintain and preserve these assets then it makes sense that
we should not be reporting $ figures but rather providing a qualitative account of whether our
objectives are being met with regard to maintenance and preservation of these items for the
purpose of providing enjoyment and benefit to the wider community.

If our primary objective was to generate revenue or profits from these assets then quantifying
them in $ terms would make sense. Get students to argue this out amongst themselves,
making sure that they get the link between objective, measurement and reporting.

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Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

Application questions

4.13 Obtain the annual reports of three companies in the same industry and consider
the items included in property, plant and equipment. Answer the following
questions.
(a) What range of measures is used to determine amounts for these items in the
reports of the individual companies? Do you think it is valid to add the
items, given the measures used? How would you interpret the total amount
for property, plant and equipment in the financial statements?
(b) Compare the measures used by the different companies for similar items.
Are there any inconsistencies in how similar items are measured by the
different companies?
(LO2 and LO3)

(a) The range of measures used will vary depending upon the annual reports selected by the
students. Students should however be able to describe succinctly the approach/approaches
taken in measuring the company’s property, plant and equipment. If there is a wide range of
measures used it may also be useful for students to think about and comment on why this is
necessary.

Adding items determined using different measurement approaches gives rise to the additivity
problem. It is not really logical to derive meaning from the total figure when a range of
different measures are used. Even if the same measurement approach was used to determine
the amounts for all property, plant and equipment items, the fact that the amounts were most
likely determined at different points in time, makes the total less meaningful.

(b) Responses will obviously vary depending upon the combination of reports selected by
students. It is important to get students to tease out why any identified inconsistencies have
occurred and develop their thoughts as to whether such inconsistency is justified.

4.14 Examine the requirements for measuring financial instruments in AASB

139/IAS 39 Financial Instruments: Recognition and Measurement. What
measures are used to determine amounts for these items? Do you think it is
necessary to use different measurement bases for different types of financial
instruments? Justify your response. (LO2 and LO3)

What measures are used to determine amounts for these items?

Students are required to examine AASB 139/IAS 39 and describe the measures required to be
used for the different categories of financial instruments.

Do you think it is necessary to use different measurement bases for different types of financial
instruments?

Encourage students to form their own view by exploring the nature of each of the different
categories of financial instruments and thinking about how they differ from one and other. It
is also important that students analyse the appropriateness of the measurement approach
required for each category and determine whether there is justification for different

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 Chapter 4: Measurement

measurement bases. The nature and characteristics of the different categories of financial
instruments should come into the discussion here.

4.15 Identify an example of a heritage asset. Analyse whether this item should be
recognised on the financial statements? Refer to the Conceptual Framework to
support your analysis. Is the item something that can be valued by quantifying it
in monetary terms? If so, how would this value be determined? Identify the
specific stakeholders that would be interested in financial information about this
heritage item. What other information about the item do you think stakeholders
might be interested in? (LO5 and LO7)

Students could come up with many examples here which may include:
 national parks
 historical buildings
 indigenous paintings and artefacts
 marine parks
 museum collections.

When analysing whether the item should be recognised on the financial statements students
should refer back to the definitions and recognition criteria for assets and liabilities in the
conceptual framework. The question of whether the items can be valued in monetary terms
should generate a lot of discussion amongst students. Some will argue that there is a logical
way to quantify particular items while for others there may not be any logical argument or
solution. There is no straight answer to this question but the objective here is to highlight
exactly that point.

Stakeholders would likely include the general public, schools, and special interest groups
such as environmentalists and historians. Note that the most prominent stakeholder is not
likely to be shareholders. Stakeholders are more likely to be interested in qualitative non-
financial information about the asset rather than financial information.

4.16 Examine the requirements for measuring assets at fair value in AASB 141/IAS
41 Agriculture.
(a) How can fair value be determined under this standard?
(b) What impact would the differences in the methods allowed to determine fair
value have on the financial reports? In particular, consider the potential
impact on reported profits.
(LO3 and LO4)

(a) Students are required to refer to AASB 141/IAS 41 and describe how fair value may be
determined under this standard.

(b) Students should be encouraged to explore this issue in depth, thinking about the specific
impacts of each method on the financial report and then exploring the impact on reported
profits in further depth. Some methods have a greater impact on reported profits than others
and students should be encouraged to take their discussion further by thinking about the
consequences of or motivations behind using a particular method to determine fair value.

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Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

4.17 Do you think the requirement for an active market should be mandatory when
measuring at fair value? What problems can occur when determining fair value
of an item in the absence of an active and liquid market? Provide examples to
justify your response.
(LO3 and LO4)

Responses to this question will vary from student to student. Students may go either way but
a good response will acknowledge arguments for and against. Some key points of relevance
are outlined below.
 Many argue that measurement at fair value can only be reliable and accurate when
determined using market prices derived from an active and liquid market.
 Reference to market prices is certainly the most objective way of determining fair
value but do the prices accurately reflect the fundamental value of the asset being
measured? In other words, can we be sure the market mechanism is operating
effectively so as to not over/under price items.
 Market price may not be reflective of the fair value of an item which makes the
information produced less relevant and useful to users. It is often argued that in some
circumstances a calculation using a specific internal model is necessary to accurately
estimate fair value.
 It is generally argued that determination of fair value in the absence of an active and
liquid market is quite subjective. Market prices are determined by the interaction of
forces outside the entity while other approaches used to estimate fair value in the
absence of an active and liquid market require management to make various
assertions and assumptions. Considerable judgment and discretion on the part of
management is involved when an active market does not exist for the item.
 Accounting information produced may be misleading if management makes
inappropriate assumptions or makes other decisions, which when left to their
judgement or discretion, are made inappropriately.
 Estimations of fair value can become quite complex and confusing from a user
perspective. This then impacts on the understandability of information produced.

Students should draw on examples that they are familiar with to justify their response.

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 Chapter 4: Measurement

4.18 The following information is provided about a particular machine used by a

company in its operations. The machine is technological in nature and new
models are coming out all the time. The machine originally cost $80 000 and it
would cost $140 000 now to replace this machine. The company expects to
receive $112 000 (discounted to present value) in cash inflows from using this
machine over the next 5 years. If we were to sell it now, the machine would bring
in $60 000. Consider the decision usefulness of accounting information produced
when using each of the above figures as a measure of the value of the machine. In
particular, consider usefulness from the perspective of the following
stakeholders:
(a) Shareholders
(b) Creditors
(c) Employees
(LO3 and LO5)

Original cost $80 000 – This represents the amount paid for the machine when it was
originally purchased. This amount is not necessarily very decision useful from a user
perspective, especially if the machine was purchased a long time ago. Users are not really
interested in how much was paid for an item in the past.

Cost $140 000 to replace the machine now – This represents the current amount we would
have to pay to purchase a machine identical to the one being replaced. This amount is a good
indicator of the current value of the machine and is decision useful from a user perspective.
However, if the machine is technological in nature and new models are coming out all the
time, this method of measuring the value of the machine does not make sense. The current
machine would most likely not be replaced with an identical one. It would be replaced with a
better and more efficient model. In which case, the current cost of an identical machine is
irrelevant. The cost of reaping the same benefits using a new and better machine may be quite
different to the cost indicated above.

Present value $112 000 – This amount represents the benefits expected to be derived from the
machine over the next 5 years in current dollars. This is a good indicator of the value of the
machine and is decision useful from a user perspective because it is forward looking and
provides information about current value and future viability.

Sell now $60 000 – This amount represents the current market value for this particular item.
In other words, the amount we would receive if we were to sell it now. This is a reasonably
good indicator of the value of the machine but could also be misleading. For example, if the
machine is still very efficient and productive, what it would sell for in the market a few years
later is not necessarily going to reflective of its value. In other words, we can argue that use
of this approach would lead to the machine being undervalued. The other side of the
argument is that this particular model may not even sell, given the technological nature of the
machine and the fact that there are new and better models on the market. One could also
argue that use of this approach would lead to the machine being overvalued. Decision
usefulness of the information produced using this approach to value the machine is therefore
questionable.

Shareholders are interested in the current value of their investment and the ability of the
entity to pay dividends in the future. Therefore present value as an indicator of the value of
the machine would be most useful from their perspective.

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Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

Creditors are interested in the entities ability to pay its debts when they become due. They are
interested in the entities current value and in particular it’s net position. The original cost of
the machine would therefore be irrelevant from their perspective. Depending upon the
particular circumstances of the machine, replacement cost, present value or even the sale
value would provide information which is useful from a creditor perspective. The approach
that will provide the most decision useful information depends on management’s intent with
regard to the asset and how long it has been held.

Employees are interested primarily in the future viability of the entity, particularly their
ability to pay their wages in the future. Therefore present value as an indicator of the value of
the machine would be most useful from their perspective.

4.19 Obtain the annual reports of two companies in different industries. Assess the
decision usefulness of the accounting information contained within these reports
from the perspective of the following stakeholders. In your response include an
explanation of how the measurement approaches adopted have impacted on the
usefulness of the information.
(a) Shareholders
(b) Managers
(c) Government
(LO3 and LO5)

Student responses to this question will vary according to the entities selected. Discussion
points raised will depend on the measurement approaches adopted by the entity and the
nature of who the key stakeholders are.

The most important thing is that students are able to develop clear links and adequately
explain these linkages between the measurement approaches adopted and the decision
usefulness of accounting information. Students should be able to identify and analyse such
linkages in some depth.

It is also important for students to note that the extent of the decision usefulness of
accounting information is very much dependent upon who the key stakeholders are. For
example, shareholders are most interested in information which reflects the current value of
the entity, its future viability and ability to generate profits, while managers are more
interested in information about the internal operation of the entity and its efficiency that will
help them to make important decisions. Government is most interested in information which
tells them about whether the entity has complied with particular rules and regulations.
Information about the general financial wellbeing of the entity may also be useful from a
government perspective, depending upon the relationship that exists between the entity and
the government.

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 Chapter 4: Measurement

4.20 Obtain the annual reports of two companies in the forestry industry (usually
available from company websites) and consider the items included in biological
assets. Answer the following questions.
(a) What range of measures is used to determine amounts for these items in the
reports of the individual companies? Do you think it is valid to add the
items, given the measures used? How would you interpret the total amount
for biological assets in the financial statements?
(b) Compare the measures used by the different companies for similar items.
Are there any inconsistencies in how similar items are measured by the
different companies?
(LO3 and LO7)

(a) The range of measures used will vary depending upon the annual reports selected by the
students and the nature of the biological assets held by the entity. Students should however be
able to describe succinctly the approach/approaches taken in measuring the company’s
biological assets. If there is a wide range of measures used it may also be useful for students
to think about and comment on why this is necessary.

Adding items determined using different measurement approaches gives rise to the additivity
problem. It is not really logical to derive meaning from the total figure when a range of
different measures are used. Even if the same measurement approach was used to determine
the amounts for all biological assets, the fact that the amounts were most likely determined at
different points in time, makes the total less meaningful.

(b) Responses will obviously vary depending upon the combination of reports selected by
students. It is important to get students to tease out why any identified inconsistencies have
occurred and develop their thoughts as to whether such inconsistency is justified.

4.21 Find a current discussion paper or proposal on the IASB website. Discuss the
measurement issues raised in the paper and examine the importance of resolving
these issues from a standard-setting perspective. (LO2 and LO6)

Responses to this question will vary depending upon what is on the IASB’s agenda at the
time. It is important that students are able to identify and summarise the measurement issues
raised in their selected paper, extending their discussion to incorporate analysis of the
consequences of issues raised and explain why resolution is important.

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Solution manual to accompany: Contemporary issues in accounting 2e by Rankin et al.

4.22 Find the comment letters received on a current proposal or discussion paper on
the IASB website and answer the following questions. (J, K, SM)
(a) Have any of the comment letters referred to measurement issues?
(b) Identify the key stakeholder groups. Establish whether there is agreement or
disagreement within these groups and between the different groups, as to the
appropriate measurement method to be used.
(c) Are there any major concerns in relation to measurement? Do you agree or
disagree with the comments made?
(LO2, LO 5 and LO6)

(a) Responses to this question will vary according to the proposal or discussion paper selected
by the student. The nature and extent of the discussion will depend upon what is out for
comment at the time.

(b) Relevant stakeholders should be clearly identified and points of consensus and
inconsistency discussed in some depth. It is important that students look for consensus and
inconsistencies within each stakeholder group as well as between the different stakeholder
groups.

(c) It is important that students are able to identify and explain the key concerns in relation to
measurement. It is also important that students take a stand as to whether they agree or
disagree with these concerns and are able to justify their view. Students might find it
interesting to think about and consider the motivations underlying stakeholder concerns.

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 Chapter 4: Measurement

Case study questions

Case study 4.1

What price for James Price Point?

Questions
1. What is a heritage asset? Should James Price Point be considered a heritage asset?
Does it meet the criteria for recognition as an asset?
2. Explain how we could measure James Price Point to determine its value. Is it
appropriate to place a monetary value on natural beauty? Is it really necessary?
3. What are the practical difficulties in measuring an asset of this kind?
4. Which is most important: economic growth and development, or preservation of the
natural environment? Can we achieve both? Use evidence from the article to
support your response.
(LO3, LO4, LO5 and LO7)

1. Heritage assets are tangible items associated with our cultural or natural environment
that communities desire to preserve. Students should link features of James Price
Point such as its natural beauty, evidence of fauna and marine life, flora and
indigenous culture back to this definition to explore whether it meets the definition of
a heritage asset. Students should refer back to the definition and recognition criteria
for assets set out in the conceptual framework to develop an argument for why it
should or should not be recognised as an asset.

2. Students should think through the appropriateness of each potential measurement

method. Cost, fair value, etc.….Arguments and logic will vary between students and
hopefully this question will generate some good debate. Fair value likely to be the
most likely argument. This would be quite a subjective estimation and it would be
good to get students to explore the potential consequences of this. Is it appropriate or
necessary? Student responses will vary here. Encourage them to argue this out
amongst themselves.

3. Practical difficulties could include the absence of an active market, the absence of a
revenue stream to predict future economic benefit, difficulties in tracking and
estimating costs associated with the asset in dollar terms and the fact that the nature of
the asset is that it is constantly changing and developing in its own natural way. In
other words, because it is part of our natural environment, what it has to offer is
always changing. What is was perceived to be worth a year ago could be quite
different to the dollar amount that would reflect its true value today.

4. Both are necessary and we can argue that one is no more important than the other.
Stable economic performance and growth is necessary for business survival while
preservation of the environment is important from an ethical and sustainability
perspective. Students should use the case of James Price Point to demonstrate this
conflict. With appropriate planning and strategy we should be able to achieve both.
Get students to argue out amongst themselves whether they think it would be possible
to achieve both in this particular situation.

© John Wiley and Sons Australia, Ltd 2018 4.18