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- 9 Marks
Question
According to the Conceptual Framework for General Purpose Financial Reports (GPFR), the objective of measurement in financial reporting in public sector entities is to select those measurement bases that most fairly reflect the cost of services, operational capacity, and financial capacity of the entity in a manner that is useful for accountability and decision-making purposes.
Required: Explain the under listed bases and discuss the extent to which each measurement reflects the cost of service, operational capacity, and financial capacity of an entity.
i) Historical cost
ii) Market Value
iii) Replacement cost
Answer
i) Historical Cost:
- Explanation: The consideration given to acquire or develop an asset, reflecting the original acquisition cost.
- Reflection:
- Cost of Service: Shows the resources expended to acquire assets used in service provision.
- Operational Capacity: Reflects the resources available for future service provision based on original cost.
- Financial Capacity: Indicates the value of assets that could serve as security against borrowing.
ii) Market Value:
- Explanation: The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
- Reflection:
- Cost of Service: Reflects asset consumption based on current market values.
- Operational Capacity: Shows the current market value of assets available for future service delivery.
- Financial Capacity: Indicates the potential sale value of assets.
iii) Replacement Cost:
- Explanation: The most economic cost required to replace the service potential of an asset at the reporting date.
- Reflection:
- Cost of Service: Equivalent to the service potential sacrificed.
- Operational Capacity: Focuses on the current value and service potential of assets.
- Financial Capacity: Does not reflect financial capacity as it does not indicate sale value.
- Tags: Historical Cost, Market Value, Measurement Bases, Public Sector, Replacement cost
- Level: Level 2
- Topic: General purpose financial reporting framework
- Series: NOV 2020
- Uploader: Kwame Aikins