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101 Concepts for the Level I Exam

Concept 46: Measurement Bases for Different Types of Assets and Liabilities

Measurement bases

  • Historical cost – Cost at which the item was actually purchased. Historical cost is highly reliable, but its relevance to an analyst declines as values change.
  • Fair value – Cost at which an item can be purchased now, in an arm’s length transaction. Fair value is more relevant to an analyst but is less reliable compared to historical cost, because it involves some level of judgment.

Different types of assets and liabilities

Current assets

  • Cash and cash equivalents – Highly liquid, low risk securities with maturity less than 90 days. They are reported at either fair value or amortized cost.
  • Accounts receivable – Amount owed to a company for goods and services sold. They are reported at net realizable value.
  • Inventories – Items held for sale or to be used for manufacture of goods to be sold. Inventories are measured at the lower of cost or net realizable value under IFRS, and at the lower of cost or market under U.S. GAAP.
  • Marketable securities – Liquid securities which are publicly traded in market. Example, bonds and stocks.

Non-current assets

  • Property, plant and equipment – Tangible assets that are used in company operations and are expected to be used over more than one fiscal period. IFRS allows companies to report PPE using either a cost model or a revaluation model. U.S. GAAP allows only the cost model.
  • Investment property – Refers to property not used in the regular operations of a company. This is an IFRS concept. Investment properties need to be valued using either the cost model or the fair value model.
  • Intangible assets – These are long term assets which lack physical substance. For e.g. patents, goodwill etc.
  • Unidentifiable intangible assets – These cannot be purchased separately and may have infinite life. These assets are tested for impairment on annual basis. For e.g. goodwill is an unidentifiable intangible asset. It is created when one company is purchased by another company. If the purchase price is greater than fair value at acquisition, then goodwill is created in the acquirers’ balance sheet.
  • Identifiable intangible assets – These assets last only for a definite period (For e.g. patents) and are amortized over lifetime of the asset
  • Financial assets include investment securities, derivatives, loans and receivables. The following table summarizes measurement of different categories of financial assets:
Asset Category Treatment
Held-for-trading (HFT) ·         Measured at fair value

·         Unrealized gains shown on Income Statement

Available-for-sale (AFS) ·         Measured at fair value

·         Unrealized gains/losses shown in Other Comprehensive Income (OCI)

Held-to-maturity (HTM) ·         Measured at cost or amortized cost

·         Unrealized gains not recorded anywhere

Current liabilities:

  • Accounts payable – Amount that a company owes to its vendors for goods/services purchased on credit.
  • Notes payable – Amount to be paid by company for short term borrowings like commercial papers.
  • Income taxes payable – Taxes recognized in the income statement but have not yet been paid.
  • Accrued expenses – Expenses that have been recognized on a company’s income statement but which have not yet been paid as of the balance sheet date.
  • Unearned revenue – Revenue for which cash has been collected but goods or service are yet to be provided. For e.g. receipt of advance rent payments will fall under this category.

Non-current liabilities:

  • Long-term financial liabilities – Include loans, notes and bonds payable. These are usually reported at amortized cost on the balance sheet.
  • Deferred tax liabilities – Result from temporary timing difference between a company’s taxable income and reported income. They are defined as the amounts of income taxes payable in future periods in respect of taxable temporary differences.

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