INTRODUCTION

Measurement

Accounting does not attempt to measure all value changes (e.g., land is recorded at its purchase price and that historical cost amount is maintained in the balance sheet, even though market value may increase over time -- this is called the "historical cost" principle). Whether and when accounting should measure changes in value has long been a source of debate among accountants. Many justify historical cost measurements because they are objective and verifiable. Others submit that market values, however imprecise, may be more relevant for decision-making purposes. This is a long-running debate, and specific accounting rules are mixed. For example, although land is measured at historical cost, investment securities are apt to be reported at market value.
Accounting standards setters in many jurisdictions around the world, including the United States, the United Kingdom, Australia, and the European Union, have issued standards requiring recognition of balance sheet amounts at fair value, and changes in their fair values in income (Bank for International Settlements, Referred on 4th May 2008).


Market Value is defined for the purpose of these Standards as follows:

Market Value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion (International Valuation Standards Committee (IVSC) - Current Publications, Referred on 4th May, 2008).








Reasons for Revaluation of Assets

a) To find the actual rate of return obtained on the capital invested.
b) In order to ensure sufficient funds for repurchase of a certain asset at the end of its useful life. Provision for depreciation based on historic cost will show inflated profits. This in turn leads to payment of excessive dividends.
c) To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings.
d) A company going in for any merger or acquisition needs to be valued at its fair price to negotiate the best price.
e) To enable proper internal reconstruction, and external reconstruction of funds.
f) To issue shares to existing shareholders or for an external issue of shares a company needs to be preparing its financial reports in terms of fair valuation of its non current assets.
g) To get fair market value of assets, in case of sale and leaseback transaction.
h) Revaluation of non current assets allows a company to seek the right amount of loan when they need it. Historical costs of assets usually land the company with a smaller loan amount that they expect.
i) Sale of an individual asset or group of assets.
j) In financial firms, revaluation reserves are required for regulatory reasons. They are included when calculating a firm's funds to give a fairer view of resources. Only a portion of the firm's total funds (usually about 20%) can be loaned or in the hands of any one counterparty at any one time (Large Exposure Regulations) (www.businessworld.com, Referred on 4 May 2008).






Measurement of financial assets and financial liabilities

Financial assets and liabilities are initially recognized at fair value. Subsequent measurement depends on how the financial instrument is categorized:

At amortised cost using the effective interest method
• Held-to-maturity investments: non-derivative financial assets with fixed or determinable payments and maturity that the entity has the positive intention and ability to hold to maturity.
• Loans and receivables: non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
• Financial liabilities that are not held for trading and not designated at fair value through profit or loss.

At fair value
• At fair value through profit or loss: Financial asset or liability that is classified as held for trading is a derivative or has been designated by the entity at inception as at fair value through profit or loss.
• Available-for-sale financial assets: Non-derivative financial assets that do not fall within any of the other categories. The unrealized movements in fair value are recognized in equity until disposal or sale, at which time, those unrealized movements from prior periods are recognized in profit or loss. If there is objective evidence that a financial asset is impaired, the carrying amount of the asset is reduced and impairment loss is recognized. A financial asset carried at amortised cost is not carried at more than the present value of estimated future cash flows. An impairment loss on an available-for-sale asset that reduces the carrying amount below acquisition cost is recognized in profit or loss.

“When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability”. (Index of /public_docs/aasb_standards, Referred on 4th May 2008).
Investment property must be initially measured at cost, including transaction costs such as legal fees and transfer taxes etc. However, in respect of not-for-profit agencies, where an investment property is acquired at no cost or for nominal cost, its cost is deemed its fair value as at the date of acquisition. It should also be noted that pursuant to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, any provision for dismantling, removal or rehabilitation recognized in respect of a newly acquired asset forms part of the cost of that asset. The initial cost of a property interest held under a finance lease and classified as an investment property is prescribed under AASB 117 Leases (AASB 117), i.e. measured at the lower of fair value and the present value of minimum lease payments. (Non-Current Asset Policies for the Queensland Public Sector (Queensland Treasury), referred on 4 May 2008).
“After initial recognition, an entity shall measure financial assets, including derivatives that are assets, at their fair values, without any deduction for transaction costs it may incur on sale or other disposal, except for the following financial assets.
(a) Loans and receivables, which shall be measured at, amortised cost using the effective interest method.
(b) Held-to-maturity investments, which shall be measured at, amortised cost using the effective interest method.
(c) Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives those are linked to and must be settled by delivery of such unquoted equity instruments, which shall be measured at cost”.
(Index of /public_docs/aasb_standards, Referred on 4th May 2008).





Frequency of revaluation
“Where the fair value of an asset in the class of non-current assets being revalued differs materially from its carrying amount, a revaluation is necessary” (Index of /public_docs/aasb_standards, Referred on 4 May 2008).
There might be a few assets whose fair value changes by immaterial amounts frequently. These assets do not require constant revaluation and measurement of change and subsequent recording is not required for such assets. In these cases, AASB recommends that measuring of fair value and subsequent recording shall be done just once in three years. Indexing the carrying amounts of non-current assets in reporting periods between more comprehensive valuations is required by the AASB.

Accounting for Revaluation Increments and Revaluation Decrements

When accounting for the revaluation of non current assets, the resulting increments or decrements in value should be recognized in the book as follows:
a) A revaluation increment should be recognized as an asset and should be credited immediately to a separate asset revaluation reserve. However if the value of the increment is such that it reverses the previous decrement recorded for the same class of non current assets (which was recorded as an expense), then this increment should be recorded as a revenue in the profit and loss account.
b) A revaluation decrement should be recognized immediately as an expense and recorded in the profit and loss account. However if there is a balance of credit in the asset revaluation reserve for the same class of non current asset then the revaluation decrement would be recorded as a debit to the revaluation decrement reserve.





Conclusion

One central objective in the development process of this report is to identify the measurement concepts, which provide the most decision-useful information to the readers. Thus, identifying the measurement concept or concepts suitable for financial accounting is of general interest to practitioners, standard setters and academics alike. While it is important to explore the different economic attributes of the competing measurement concepts, the question as to which measurement concept provides the most decision-useful information is predominantly an empirical question. Different users have different information needs and thus, favor and require different measurement concepts. Balancing the potentially conflicting user needs requires judgment. In order to provide this judgment, the standard setters need information about the information needs and opinions of different user groups. AASB standards have always been attending to the cause and have been updated regularly so as to ensure free flow of accounting entries which are unambiguous.
The concept of measurement of unrealized profits/losses upon property or other non current assets has been handled in this report and we would like to conclude by stating that any changes or corrections in any of the statements made in this report are welcome.
Thank you.











References
a) Henderson S. Peirson G. Herbohn K. (2008), “Issues in Financial Accounting” 13th Ed, Pearson Education Australia
b) Ravlic T (1998), “Accounting for Currency Storms” Australian CPA, Melbourne Vol.68, issue 9, pg 16-19
c) Financial Times (2001), “Financial Reporting Accounting Solutions – Foreign gains and losses on loans” Financial Times, London, vol 128, issue 1299, pg 1
d) Dove R. (2004), “Forex Transactions” Institute of Chartered Accountants in England and Wales, London, Vol 122, Issue 1259, Pg 70
e) CPA Australia (2004), “Fact Sheet 121-AASB The Effects of Changes in Foreign Exchange Rates” CPA Australia Fact Sheet Series, CPA Australia - Home Page Accessed 3/5/08
f) accfinweb.account.strath.ac.uk/msc_acc
g) www.fasab.gov/pdffiles/
h) Wiley InterScience
i) BusinessDictionary.com - Online Business Dictionary
j) www.allinterview.com/showanswers
k) online shopping
l) www.businessworld.com
m) Money Matters to Me - Homepage
n) Financial Planning: A Comprehensive Guide to Personal Finance
0) HBS Working Knowledge - Faculty Research at Harvard Business School
p) Index No Browsingconcept
q) Basiccollegeaccounting.com/
r) Future Accountant » Guiding you into the Future