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 method for equity investments that are at fair value through profit or loss or at fair value through OCI.
b. Explain, for investments in debt securities, why measurement at amortized cost is more appropriate for debt investments for which the business model is to collect contractual cash flows, but one of the fair value methods is more appropriate for investments for which the business model includes an intent to profit from changes in value of the investment.
c. Explain why it is appropriate for changes in fair value to flow through income when the investment is classified as at fair value through profit or loss, but the same changes in fair value flow through other comprehensive income when the investment is classified as at fair value through OCI.

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