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Lecture 4

AYB311 - Lecture 4 Notes

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LECTURE 4 – MEASUREMENT ASSIGNMENT NOTES  Please note there is a revised version of the lecture slides on BB  It provides two recommended texts – they are available in the library  The relevant texts from this are on blackboard – this should act as a starting point for you o Keep checking blackboard – it was not up as of 3pm Friday but Janet did say that it will be up.  There is another book called Positive Accounting Theory that will go on blackboard as well o Also find notes in the AYB200 textbook, Financial Accounting (Deegan) o Be prepared to look at older material – free market was a big idea in the 1980s. This is helpful for when searching for journal articles o There are no straight answers from the set text or the lecture slides for this topic  There is a 1000 word limit, there is no need to meet 1000 just because it is the ‘max’. Can write it well and succinctly in less than that, it is fine  Ensure you meet the bibliographical requirements as set out in the assignment task sheet  The balance sheet without numbers is not useful – nothing about size of profitability  Shows the industry the company is working in  Shows the company has no long-term debt  The addition of numbers provides measurement The need for measurement in financial reporting  Usefulness of financial statements depends on: o What items should be included or excluded from the financial statements? o How should the items that are included be measured? What is measurement and what it involves? Step one  Measurement o Is the act or process of measuring  Measure o Quantity, weight, height and so on o A unit for stating the size, weight and so on o An agreed unit of this quantity o The extent or dimension of a thing  Identifying an attribute o Person o Building  Size ie the amount of rent  Architectural merit  Historical merit – will this increase?  Need to choose which to measure – what is the purpose for measurement Step Two  Process of measurement o How …  type of scale  Interval – there is no 0 ie clothes sizing  Ratio – there is a 0 ie dollars Deciding how to measure: scale and unit  The unit of measurement o Nominal  The quantity or number of physical dollars involved in a transaction  The amount you pay to recieve a product / service ie $10 for a book from the bookshop o Constant dollars  The number of dollars involved in a transaction adjusted for current purchasing power now  What would you have to pay for something now compared to when you first purchased it o Ie the cost of milk today compared to 30 years ago o It is this value is that often useful in making accounting decisions  Which unit to use  Depends on purpose and objective in measuring the item o Nominal dollars has been used traditionally o Constant dollars used in some current cost accounting systems  This is not used for financial statements Issues and problems with measurement in accounting  Which measurement is used  Allows for choice  Can only be used when it has a cost or value that can be measured reliably  The basis of measurement choice is critically important  The framework does not recommend or require any particular measurement basis  There is indirect guidance in the objectivies and qualitative characteristics that the framework says information should have  Information should be to help decision makers make decisions. This is the major reason which influence the presentation of financial statements. This depends on who is making the decision ie a shareholder, lender, government (tax)  Subjectivity  Actual measurements  Requirements and Guidance for Measurement in accounting o The role of objectives and qualitative characteristics  Relevance  Reliability  Understandably  Comparable (to a lesser extent)  When looking at multiple companies within one firm o The role of subjectivity  Necessary because judgements are going to be made  The choice allows flexibility to best reflect the economic situation of the corporation at hand to reflect a true and fair view of the entity  It does however lead to opportunistic behaviour – ie fair value would increase the value of assets to improve the debt to asset ratio of the company. This may not reflect the economic substance of the entity but may ensure that there are no issues with the debt covenant of the entity  The focus on individual items and a system of measurement  The Issue of Additivity Requirements and guidance for measurement in accounting  For an item that meets the definition of an element in the financial statements to be recognised it must “have a cost or value that can be measured reliably”  Framework does not either require or recommend any particular measurement bases. However indirect guidance in the objective and qualitative characteristics o Measurement in accounting is not holistic o In an ideal system, the measurement system would be chosen to best meet the objectives and purposes of the item o There is no overall system of measurement in accounting o Measurement is done at the individual item level – assets are measured individually  The standards do reduce the amount of variation by requiring certain measurements be used in certain situations  Financial statements are provided to o Help users make decisions: o Broad groups of users o Wide variety of decisions  Different information may be required by users for these different decisions  Qualitative characteristics o Relevant o Reliable o Understandable o Comparable o So while we can see some guidance here there is still a need for accountants to make judgements  Subjectivity that results from the judgements has 2 consequences  Choice will allow flexibility so that accounting choices and measurements can be made that best reflect the economic substance of the entity concerned  But also allows for opportunistic behaviour The focus on individual items and a system of measurement  Measurement of accounting o Not holistic  Ideal system of measurement o Chooses attributes,
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