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ACCT 001 Lecture Notes - Lecture 10: Historical Cost, Net Present Value, Price Level

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taupesardine275
17 Sep 2020
School
College of The Sequoias
Department
Accounting (ACCT)
Course
ACCT 001
Professor
skaff

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Document Summary

Values assets the amount paid or promised to acquire the assets. Values liabilities at the amounts of any associated promises. Anything valued at historical cost is value at its expected lowest or most. Additional points conservative value of future benefits at the date of acquisition. Acquisition: historical cost = market value = value in use (present vale) Criticism with historical cost is its time issues. Is market value falls below original cost, asset may be written down to the. Price level adjusted historical cost market value. Adjusts the changes in the value or purchasing power of the dollar. Lack of popularity is that if historical cost is unsatisfactory compared to current values, adjusting the cost for inflation still makes it unsatisfactory, only now less understandable. Current or market value (value in exchange) Records the individual assets and liabilities at their current particular market value. Focuses on individual values of the asset and liability items.

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Related Questions

FASB SFAS 157 was issued September 2006 for application tofinancial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.This Statement, which applies to assets and liabilities, definesfair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. The statement does notapply to assets acquired and liabilities assumed in an acquisitionof a business or non-profit activity by a not-for-profit entitythat are required to be measured at fair value under FASB StatementNo. 164. The objective of a fair value measurement is to determinethe price that would be received to sell the asset or paid totransfer the liability at the measurement date which is the exitprice. The fair value measurement assumes that the asset orliability is exchanged in an orderly transaction between marketparticipants. For assets, fair value measurement assumes thehighest and best use of the asset by market participants,considering the use of the asset that is physically possible,legally permissible, and financially feasible at the measurementdate. The highest and best use of the asset establishes thevaluation premise. For liabilities, it is assumed that theliability is transferred to a market participant at the measurementdate and that the nonperformance risk relating to that liability isthe same before and after its transfer. The fair value of theliability shall reflect the nonperformance risk relating to thatliability. As in our text, the position in the statement is thatvaluation techniques must be consistently applied. It emphasizesthose valuation techniques using the market approach, incomeapproach, and cost approach to measure fair value. In some cases asingle valuing technique may serve the purpose, however in others,using multiple techniques may be more appropriate. The informationthat is available will help to determine which method that shouldbe used. Examples are provided in Appendix A to illustrate thevarious approaches for certain transactions. The statement alsoestablishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value by placing theminto three broad levels in order to increase consistency andprovide better comparability. Level 1 is given the highest priorityand is based on quoted prices (unadjusted) in active markets foridentical assets or liabilities that the reporting entity has theability to access at the measurement date. Level 2 is based oninformation other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly orindirectly through substantiation with observable market data.Level 3 has the lowest priority and is based on unobservable inputsfor the asset or liability, primarily, inputs that reflect thereporting entity’s own assumptions.

Follow-Up Discussion Expand upon any of the points identified byyour classmates and/or ask for clarification on points that you donot understand.

I have provided the classmates response.

300 words

From page 152 in the eText

In considering its proposed statement of financial accountingstandards on business combinations, the FASB received numerouscomment letters. Many of these letters addressed the FASB'sproposed adoption of the economic unit concept as a valuation basisfor less-than-100-percent acquisitions. A sampling of these lettersincludes the following observations:

Bob Laux, Microsoft: Microsoft agrees with theBoard that the principles underlying standards should strive toreflect the underlying economics of transactions and events.However, we do not believe the Board's conclusion that recognizingthe entire economic value of the acquiree, regardless of theownership interest in the acquiree at the acquisition date,reflects the underlying economics.

Patricia A. Little, Ford Motor Company: Weagree that recognizing 100 percent of the fair value of theacquiree is appropriate. We believe that this is crucial in erasinganomalies which were created when only the incremental ownershipacquired was fair valued and the minority interest was reflected atits carryover basis.

Sharilyn Gasaway, Alltel Corporation: One ofthe underlying principles … is that the acquirer should measure andrecognize the fair value of the acquiree as a whole. If 100 percentof the ownership interests are acquired, measuring and recognizing100 percent of the fair value is both appropriate and informative.However, if less than 100 percent of the ownership interests areacquired, recognizing the fair value of 100 percent of the businessacquired is not representative of the value actually acquired. Inthe instance in which certain minority owners retain theirownership interest, recognizing the fair value of the minorityinterest does not provide sufficient benefit to financial statementusers to justify the additional cost incurred to calculate thatfair value.

PricewaterhouseCoopers: We agree that thenoncontrolling interest should be recorded at its fair value whenit is initially recorded in the consolidated financial statements.As such, when control is obtained in a single step, the acquirerwould record 100 percent of the fair value of the assets acquired(including goodwill) and liabilities assumed.

Loretta Cangialosi, Pfizer: While we understandthe motivation of the FASB to account for all elements of theacquisition transaction at fair value, we are deeply concernedabout the practice issues that will result. The heavy reliance onexpected value techniques, use of the hypothetical marketparticipants, the lack of observable markets, and the obligation toaffix values to “possible” and even “remote” scenarios, among otherrequirements, will all conspire to create a standard that willlikely prove to be nonoperational, unauditable, representationallyunfaithful, abuse-prone, costly, and of limited (and perhapsnegative) shareholder value.

Do you think the FASB made the correct decision in requiringconsolidated financial statements to recognize all subsidiary'sassets and liabilities at fair value regardless of the percentageownership acquired by the parent?

In considering its proposed statement of financial accountingstandards on business combinations, the FASB received numerouscomment letters. Many of these letters addressed the FASB'sproposed adoption of the economic unit concept as a valuation basisfor less-than-100-percent acquisitions. A sampling of these lettersincludes the following observations:

•Bob Laux, Microsoft: Microsoft agrees with the Board that theprinciples underlying standards should strive to reflect theunderlying economics of transactions and events. However, we do notbelieve the Board's conclusion that recognizing the entire economicvalue of the acquiree, regardless of the ownership interest in theacquiree at the acquisition date, reflects the underlyingeconomics.

•Patricia A. Little, Ford Motor Company: We agree thatrecognizing 100 percent of the fair value of the acquiree isappropriate. We believe that this is crucial in erasing anomalieswhich were created when only the incremental ownership acquired wasfair valued and the minority interest was reflected at itscarryover basis.

•Sharilyn Gasaway, Alltel Corporation: One of the underlyingprinciples … is that the acquirer should measure and recognize thefair value of the acquiree as a whole. If 100 percent of theownership interests are acquired, measuring and recognizing 100percent of the fair value is both appropriate and informative.However, if less than 100 percent of the ownership interests areacquired, recognizing the fair value of 100 percent of the businessacquired is not representative of the value actually acquired. Inthe instance in which certain minority owners retain theirownership interest, recognizing the fair value of the minorityinterest does not provide sufficient benefit to financial statementusers to justify the additional cost incurred to calculate thatfair value.

•PricewaterhouseCoopers: We agree that the noncontrollinginterest should be recorded at its fair value when it is initiallyrecorded in the consolidated financial statements. As such, whencontrol is obtained in a single step, the acquirer would record 100percent of the fair value of the assets acquired (includinggoodwill) and liabilities assumed.

•Loretta Cangialosi, Pfizer: While we understand the motivationof the FASB to account for all elements of the acquisitiontransaction at fair value, we are deeply concerned about thepractice issues that will result. The heavy reliance on expectedvalue techniques, use of the hypothetical market participants, thelack of observable markets, and the obligation to affix values to“possible” and even “remote” scenarios, among other requirements,will all conspire to create a standard that will likely prove to benonoperational, unauditable, representationally unfaithful,abuse-prone, costly, and of limited (and perhaps negative)shareholder value.

Do you think the FASB made the correct decision in requiringconsolidated financial statements to recognize all subsidiary'sassets and liabilities at fair value regardless of the percentageownership acquired by the parent?