Accounting Standards Provide for a Variety of Different Measurement Bases

question 57

Essay

Accounting standards provide for a variety of different measurement bases for different types of financial assets. IFRS has several measurement bases, namely:
•consolidation
•fair value with changes through income
•proportionate consolidation
•fair value with changes through other comprehensive income
•equity method
•amortized cost
Required:
a. Explain why reporting entities should, on the one hand, use consolidation, proportionate consolidation, and the equity method for investments in subsidiaries, joint ventures, and associates, but on the other hand, use the fair value methods for equity investments that are held for trading or available for sale.
b. Explain, for investments in debt securities, why the amortized cost method is more appropriate for held-to-maturity investments, but one of the fair value methods is more appropriate for held-for-trading or available-for-sale securities.
c. Explain why it is appropriate for changes in fair value to flow through income when the investment is classified as held for trading, but the same changes in fair value flow through other comprehensive income when the investment is classified as available for sale.

---

Definitions:

Bankruptcy

A legal process wherein individuals or entities declare their inability to pay back their debts.

Sinking Fund

A fund established by a borrower, setting aside revenue over time to repay a debt or replace a depreciating asset in the future.

Call Provisions

Terms in a bond contract that allow the issuer to repurchase and retire the bond at a specified price before maturity, protecting against interest rate risk.

Bond Indenture

A legal contract between a bond issuer and a bondholder, detailing the terms of the bond such as the coupon rate, maturity date, and obligations of the issuer.